Putnam
Tax-Free
Insured
Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-04
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
Over the past several months, Putnam has introduced a number of reforms
for the benefit of shareholders, including increasing the amount of
disclosure for our funds. We would like to call your attention to new
information now being included in shareholder reports. Following the
performance tables in the Performance Summary, you can find expense and
risk comparisons as well as portfolio turnover information for your
fund. The expense information lets you estimate the amount you have paid
for ongoing expenses such as management fees and distribution (or 12b-1)
fees and lets you compare these expenses with the average expense level
for your fund's peer group, as tracked by Lipper, an independent
fund-rating company. The risk comparison information illustrates your
fund's risk relative to similar funds as tracked by Morningstar, another
independent fund-rating company. The portfolio turnover information
explains how the rate at which a fund buys and sells portfolio
securities might affect its return and its taxable distributions to
shareholders. It also compares your fund's portfolio turnover rate with
that of its industry peers, as measured by Lipper. We believe all of
this information can be valuable to you and your financial advisor when
you make decisions about your financial program.
In the municipal bond market, as interest rates moved up high-yield
securities performed relatively better than issues with high credit
ratings. However, thanks to its duration strategy, the improving
performance of California municipal bonds, and advance refundings of two
key holdings, Putnam Tax-Free Insured Fund delivered solid returns for
the fiscal year ended July 31, 2004. In the following pages, the
managers describe how market conditions changed during the year and how
the fund responded. They also outline their expectations for the coming
months.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
September 15, 2004
Report from Fund Management
Fund highlights
* Putnam Tax-Free Insured Fund's total return for the fiscal year ended
July 31, 2004 was 5.20% for class A shares at net asset value (NAV) and
0.22% at public offering price (POP).
* The fund's relatively short duration strategy and differences in
credit quality caused its results to lag its benchmark, the Lehman
Municipal Bond Index, which returned 5.78% for the same period.
* Price appreciation from two bond refundings and the performance of its
California holdings helped keep the return at NAV in line with the
average for the Lipper Insured Municipal Debt Funds category, which was
5.13% for the 12-month period.
* See the Performance Summary beginning on page 7 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
When interest rates generally declined earlier in the fiscal year,
lower-quality bonds outperformed the high-quality, insured bonds that
make up your fund's portfolio. This, along with our conservative
duration strategy, put the fund at a slight disadvantage. Consequently,
its performance for fiscal 2004 lagged that of the Lehman Municipal Bond
Index -- a broad-based index that includes lower-quality bonds. However,
its relatively short duration -- which translated into reduced
interest-rate sensitivity -- benefited the fund in the spring and early
summer when interest rates rose. Within the universe of bonds available
to this fund, its emphasis on bonds maturing in the 15- to 20-year range
was a positive during the year, as shorter-term bonds maturing in five
years or less lagged the market. Moreover, as California's credit rating
began to improve later in the year, the fund's relatively substantial
position in California insured bonds rose with the market. Some of the
fund's individual California holdings saw their underlying ratings
upgraded, and two Pennsylvania School District bonds that were advance
refunded provided additional appreciation. These factors combined to
produce results that kept the fund in line with the average for its
Lipper category.
FUND PROFILE
Putnam Tax-Free Insured Fund invests in bonds that are insured as to
timely payment of principal and interest, escrowed by securities
guaranteed by the U.S. government, and/or bonds that are rated AAA (or
the equivalent), which is the highest credit rating available. The fund
is intended and may be appropriate for investors seeking high current
income free from federal income tax.
Market overview
Municipal bond yields drifted irregularly lower between the beginning of
August 2003 and early March 2004, and then rose dramatically in the
spring and early summer before subsiding again at the end of the fiscal
year. Since bond prices move in the opposite direction of interest
rates, this meant that returns were positive in the first part of the
year, fell off in the early summer, and then rose again in the closing
weeks of the fiscal year.
Economic growth seemed lackluster and inflation was tame for most of the
fiscal year, but data released in March was surprisingly strong,
bringing back inflation fears and sending yields higher. The yield on
10-year, AAA municipal bonds rose about 1% from mid March through early
June, but declined by about 0.5% in between early June and the end of
July. On June 30, the Federal Reserve Board raised the federal funds
rate (the rate banks charge one another on overnight loans) from 1.0% to
1.25%, and followed this with an increase to 1.50% just after the end of
the period. Note, however, that these moves have more influence on the
short end of the market than on the longer-term bonds that make up the
majority of your fund's holdings.
For the fiscal year as a whole, the yield curve flattened, as rates on
bonds maturing in the one- to five-year range rose, while rates on bonds
maturing in 15 to 30 years fell. The best-performing area of the curve
was the 15-20 year range. California bonds -- including insured bonds --
improved as the state appeared to be taking steps to improve its
financial health. In May, California issued the first portion of its
recently approved $15 billion bond issue to help alleviate the state's
budget crisis.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/04
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 5.78%
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Lehman Aggregate Bond Index (broad bond market) 4.84%
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Lehman GNMA Index (Government National Mortgage Association
bonds) 4.67%
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Lehman Global Aggregate Bond Index (international bonds) 7.72%
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Equities
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S&P 500 Index (broad stock market) 13.17%
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Russell 2000 Index (stocks of small and midsize companies) 17.06%
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MSCI EAFE Index (international stocks) 25.05%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 7/31/04.
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Strategy overview
Duration is a measure of a fund's sensitivity to changes in interest
rates. A short duration may protect principal when interest rates are
rising, but it can reduce the fund's appreciation potential when rates
fall. The fund began the fiscal period with a relatively short duration
as a defensive measure. In August 2003, we changed to a more neutral
stance, striving to make the fund about equal in sensitivity to interest
rate changes as the overall market.
We reduced the fund's duration further in the fall and winter months, as
increasing evidence that the economy was growing rekindled inflation
concerns and the prospect of rising interest rates. In fact, bond yields
generally declined in the first half of the year, so our strategy at
that time detracted somewhat from the fund's relative performance.
However, we believed a more defensive posture was warranted. When rates
spiked dramatically in March and April, this positioning paid off. Since
then, we have allowed the fund's duration to edge back toward neutral,
although it is still slightly defensive because we expect rates to rise
further in coming months.
During most of the fiscal year, the fund emphasized non-callable bonds
- -- bonds that the issuer is not permitted to redeem (or call) before the
maturity date. These issues performed well as rates fell through March
2004, but during the spring we began to moderate this position, selling
non-callable bonds and purchasing callable issues scheduled to mature in
the 15- to 20-year range. We believe callable bonds may perform better
than non-callable bonds if interest rates continue to rise and the yield
curve flattens further.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
as of 7/31/03 as of 1/31/04 as of 7/31/04
Average effective
maturity in years 9.2 8.1 7.3
Duration in years 6.4 5.9 5.5
Footnote reads:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective
maturity (a weighted average of the holdings' maturities).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.
How fund holdings affected performance
The fund benefited during the year when two of its bonds -- both issued
by the Philadelphia, Pennsylvania School District -- were advance
refunded. One was scheduled to mature in 2031 and the other in 2018.
Both will now be called away in 2012, but both have appreciated in
value. Just as homeowners refinance mortgages when interest rates
decline, a refunded bond is created when municipalities refinance older
bonds they issued when rates were higher. Unlike a home mortgage,
however, the original municipal bond remains outstanding, with a shorter
potential maturity, as the call date effectively becomes the new
maturity date. The municipality uses the proceeds of the older bond to
buy a portfolio of U.S. Treasury securities, creating an escrow account
that provides the backing for interest and principal payments on the
refunded bonds. Refunded bonds typically enjoy the equivalent of
AAA-rated quality.
The fund also benefited from its relatively large position in California
State Department of Water Resources insured bonds. Investors have begun
to feel more confident that California is addressing its financial
issues. As the state's plans to improve its finances gained acceptance
in the market, demand has picked up for all California bonds, pushing
prices up. Another boost to California bond prices came from credit
upgrades. The state's credit rating was upgraded by Moody's in May to A3
from Baa1. Moody's also upgraded the Department of Water Resources bonds
to A2 from A3 in July. While your fund's bonds are insured and therefore
perceived as less risky than uninsured bonds, their prices still benefit
from improvement in their underlying credit ratings and the resulting
increase contributed to the fund's performance.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa (93.1%)
A-1 (2.7%)
VMIG1 (4.2%)
Footnote reads:
As a percentage of market value as of 7/31/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's
ratings; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary
in the future.
The fund's management team
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), James St. John
(Portfolio Member), and Kevin Cronin.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
Early in 2004, lingering unemployment had been an anomaly in an
otherwise robust economic recovery. However, in early April, employment
data began to show a marked improvement in job creation. We believe the
economy will continue to grow -- albeit at a slower rate -- and that the
underlying strength in the economy will foster higher interest rates in
the future. We also expect the Fed to raise the federal funds rate
several times between now and June 2005. This should contribute to
further flattening in the yield curve, as we believe short-term interest
rates are likely to rise faster than long rates.
In keeping with our views, the fund's duration is now being managed to
maintain the portfolio in a more defensive mode. We plan to continue our
focus on callable bonds and will also continue our policy of seeking
diversification by sector and issuer. As always, we will closely monitor
market conditions and seek to manage the fund's risk/return profile as
we pursue an attractive level of tax-free income from insured bonds.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Capital gains, if
any, are taxable for federal and, in most cases, state purposes. For
some investors, investment income may be subject to the federal
alternative minimum tax. Income from federally exempt funds may be
subject to state and local taxes. Mutual funds that invest in bonds are
subject to certain risks, including interest-rate risk, credit risk, and
inflation risk. As interest rates rise, the prices of bonds fall.
Long-term bonds are more exposed to interest-rate risk than short-term
bonds. Unlike bonds, bond funds have ongoing fees and expenses. Shares
of this fund are not insured, and their prices will fluctuate with
market conditions. Tax-free funds may not be suitable for IRAs and other
non-taxable accounts.
Performance summary
This section shows your fund's performance during its fiscal year, which
ended July 31, 2004. In accordance with regulatory requirements, we also
include performance for the most current calendar quarter-end.
Performance should always be considered in light of a fund's investment
strategy. Data represents past performance. Past performance does not
guarantee future results. More recent returns may be less or more than
those shown. Investment return and principal value will fluctuate and
you may have a gain or a loss when you sell your shares. For the most
recent month-end performance, please visit www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 7/31/04
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Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
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NAV POP NAV CDSC NAV CDSC NAV POP
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1 year 5.20% 0.22% 4.52% -0.48% 4.40% 3.40% 4.93% 1.54%
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5 years 30.87 24.71 27.49 25.49 25.91 25.91 28.92 24.70
Annual average 5.53 4.51 4.98 4.65 4.72 4.72 5.21 4.51
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10 years 73.00 64.83 66.34 66.34 59.60 59.60 67.55 62.17
Annual average 5.63 5.12 5.22 5.22 4.79 4.79 5.30 4.95
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Annual average
(life of fund) 6.98 6.70 6.73 6.73 6.42 6.42 6.77 6.58
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively (which
for class A shares does not reflect a reduction in sales charges that
went into effect on January 28, 2004; if this reduction had been in
place for all periods indicated, returns would have been higher). Class
B share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class A, C,
and M shares for the periods prior to the initial issuance of such
shares is derived from the historical performance of class B shares,
adjusted for the applicable sales charge (or CDSC) and higher or lower
operating expenses for such shares.
A 2% short-term trading fee will be applied to shares exchanged or sold
within 5 days of purchase.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/04
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Lehman Lipper Insured
Municipal Municipal Debt Funds
Bond Index category average*
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1 year 5.78% 5.13%
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5 years 34.28 28.11
Annual average 6.07 5.07
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10 years 85.64 69.84
Annual average 6.38 5.43
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Annual average
(life of fund) 7.88 7.15
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 1-, 5-, and 10-year periods ended 7/31/04, there were 53, 45,
and 28 funds, respectively, in this Lipper category.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment, 7/31/94 to 7/31/04
Fund's class A Lehman Municipal
Date shares at POP Bond Index
7/31/94 9,550 10,000
7/31/95 10,062 10,787
7/31/96 10,963 11,499
7/31/97 11,787 12,678
7/31/98 12,514 13,438
7/31/99 12,592 13,824
7/31/00 13,221 14,420
7/31/01 14,459 15,874
7/31/02 15,310 16,939
7/31/03 15,715 17,549
7/31/04 $16,483 $18,564
Footnote reads:
Past performance does not indicate future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $16,634 and $15,960, respectively, and
no contingent deferred sales charges would apply. A $10,000 investment
in the fund's class M shares would have been valued at $16,755 ($16,217
at public offering price). See first page of performance section for
performance calculation method.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/04
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Class A Class B Class C Class M
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Distributions (number) 12 12 12 12
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Income 1 $0.527061 $0.429185 $0.406489 $0.482883
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Capital gains 1
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Long-term $0.204000 $0.204000 $0.204000 $0.204000
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Short-term $0.052500 $0.052500 $0.052500 $0.052500
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Total $0.783561 $0.685685 $0.662989 $0.739383
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Share value: NAV POP NAV NAV NAV POP
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7/31/03 $14.93 $15.67 $14.95 $14.95 $14.97 $15.47
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7/31/04 14.92 15.62* 14.94 14.94 14.96 15.46
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Current return (end of period)
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Current dividend rate 2 3.30% 3.15% 2.65% 2.50% 3.00% 2.90%
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Taxable equivalent 3 5.08 4.85 4.08 3.85 4.62 4.46
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Current 30-day SEC yield 4 3.01 2.88 2.37 2.22 2.72 2.63
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Taxable equivalent 3 4.63 4.43 3.65 3.42 4.18 4.05
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* Reflects a reduction in sales charges that took effect on January 28,
2004.
1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 35.00% federal tax rate for 2004. Results for
investors subject to lower tax rates would not be advantageous.
4 Based only on investment income, calculated using SEC guidelines.
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TOTAL RETURN FOR PERIODS ENDED 6/30/04 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
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NAV POP NAV CDSC NAV CDSC NAV POP
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1 year -0.36% -5.08% -1.00% -5.73% -1.19% -2.14% -0.61% -3.90%
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5 years 29.40 23.23 26.07 24.07 24.23 24.23 27.47 23.28
Annual average 5.29 4.27 4.74 4.41 4.43 4.43 4.97 4.28
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10 years 73.51 65.33 66.84 66.84 60.16 60.16 67.97 62.53
Annual average 5.67 5.16 5.25 5.25 4.82 4.82 5.32 4.98
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Annual average
(life of fund) 6.93 6.65 6.68 6.68 6.37 6.37 6.72 6.54
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Understanding your
fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. Using the
information below, you can estimate how these expenses affect your
investment and compare them with the expenses of other funds. You may
also pay one-time transaction expenses, including sales charges (loads)
and redemption fees, which are not shown in this section and would have
resulted in higher total expenses. For more information, see your fund's
prospectus or talk to your financial advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000
investment in Putnam Tax-Free Insured Fund from February 1, 2004, to
July 31, 2004. It also shows how much a $1,000 investment would be worth
at the close of the period, assuming actual returns and expenses.
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 7/31/04
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Class A Class B Class C Class M
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Expenses paid per
$1,000* $4.32 $7.57 $8.31 $5.82
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Ending value (after
expenses) $996.80 $993.20 $992.30 $994.90
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* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the
ongoing expenses as a percentage of net assets for the six months
ended 7/31/04. The expense ratio may differ for each share class
(see the table at the bottom of the next page). Expenses are
calculated by multiplying the expense ratio by the average account
value for the period; then multiplying the result by the number of
days in the period; and then dividing that result by the number of
days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended July
31, 2004, use the calculation method below. To find the value of your
investment on February 1, 2004, go to www.putnaminvestments.com and log
on to your account. Click on the "Transaction History" tab in your Daily
Statement and enter 02/01/2004 in both the "from" and "to" fields.
Alternatively, call Putnam at 1-800-225-1581.
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HOW TO CALCULATE THE EXPENSES YOU PAID
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Total
Value of your Expenses paid expenses
investment on 2/1/04 [DIV] $1,000 X per $1,000 = paid
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Example Based on a $10,000 investment in class A shares of your fund.
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$10,000 [DIV] $1,000 X $4.32 (see table above) = $43.20
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Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines
to help investors assess fund expenses. Per these guidelines, the table
below shows your fund's expenses based on a $1,000 investment, assuming
a hypothetical 5% annualized return. You can use this information to
compare the ongoing expenses (but not transaction expenses or total
costs) of investing in the fund with those of other funds. All mutual
fund shareholder reports will provide this information to help you make
this comparison. Please note that you cannot use this information to
estimate your actual ending account balance and expenses paid during the
period.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 7/31/04
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Class A Class B Class C Class M
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Expenses paid per
$1,000* $4.37 $7.66 $8.42 $5.89
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Ending value (after
expenses) $1,020.81 $1,017.55 $1,016.79 $1,019.30
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* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended 7/31/04.
The expense ratio may differ for each share class (see the table at the
bottom of this page). Expenses are calculated by multiplying the expense
ratio by the average account value for the period; then multiplying the
result by the number of days in the period; and then dividing that
result by the number of days in the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with industry averages, as
determined by Lipper, an independent fund-rating agency that ranks funds
relative to others that Lipper considers to have similar investment
styles or objectives. The expense ratio for each share class shown below
indicates how much of your fund's net assets have been used to pay
ongoing expenses during the period.
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EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
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Class A Class B Class C Class M
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Your fund's annualized
expense ratio+ 0.86% 1.51% 1.66% 1.16%
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Average annualized expense
ratio for Lipper peer
group++ 0.93% 1.58% 1.73% 1.23%
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+ For the fund's most recent fiscal half year; may differ from expense
ratios based on one-year data in the financial highlights.
++ For class A shares, expenses shown represent the average of the expenses
of front-end load funds viewed by Lipper as having the same investment
classification or objective as the fund, calculated in accordance with
Lipper's standard reporting methodology for comparing expenses within a
given universe. All Lipper data is for the most recent fiscal periods
available as of 6/30/04. For class B, C and M shares, Putnam has
adjusted the Lipper total expense average to reflect higher 12b-1 fees
incurred by these classes of shares. The peer group may include funds
that are significantly larger or smaller than the fund, which may limit
the comparability of the fund's expenses to the Lipper average.
Understanding your fund's
portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries,
economies, and markets. Portfolio turnover is a measure of how often a
fund's managers buy and sell securities for your fund. A portfolio
turnover of 100%, for example, means that the managers sold and replaced
securities valued at 100% of a fund's assets within a one-year period.
Funds with high turnover may be more likely to generate capital gains
and dividends that must be distributed to shareholders as taxable
income. High turnover may also cause a fund to pay more brokerage
commissions and other transaction costs, which may detract from
performance.
Funds that invest in bonds may have higher turnover than funds that
invest only in stocks. Short-term bond funds tend to have higher
turnover than longer-term bond funds, because shorter-term bonds will
mature or be sold more frequently than longer-term bonds. You can use
the table below to compare your fund's turnover with the average
turnover for funds in its Lipper category.
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TURNOVER COMPARISONS
percentage of holdings that change every year
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2004 2003 2002 2001 2000
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Putnam Tax-Free
Insured Fund 27% 43% 55% 37% 22%
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Lipper Insured Municipal
Debt Funds Average 58% 61% 54% 49% 69%
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Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on July 31. Turnover data for the fund's Lipper
category is calculated based on the average of the turnover of each fund
in the category for its fiscal year ended during the indicated year,
with the exception of 2004 data. Lipper data for 2004 represents the
average turnover for each fund in the category for its most recent
fiscal year and for which data is available as of 6/30/04.
Risk comparison
As part of new initiatives to enhance disclosure, we are including a
risk comparison to help you understand how your fund compares with other
funds. The comparison utilizes a risk measure developed by Morningstar,
an independent fund-rating agency. This risk measure is referred to as
the fund's Overall Morningstar Risk.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 0.25
Municipal bond
fund average 0.22
0% INCREASING RISK 100%
Your fund's Overall Morningstar Risk is shown alongside that of the
average fund in its broad asset class, as determined by Morningstar. The
risk bar broadens the comparison by translating the fund's Overall
Morningstar Risk into a percentile, which is based on the fund's ranking
among all funds rated by Morningstar as of 6/30/04. A higher Overall
Morningstar Risk generally indicates that a fund's monthly returns have
varied more widely.
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those
measures are weighted and averaged to produce the fund's Overall
Morningstar Risk. The information shown is provided for the fund's class
A shares only; information for other classes may vary. Overall
Morningstar Risk is based on historical data and does not indicate
future results. Morningstar does not purport to measure the risk
associated with a current investment in a fund, either on an absolute
basis or on a relative basis. Low Overall Morningstar Risk does not mean
that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein
(1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate,
complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares (since reduced to 4.50%) and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Global Aggregate Bond Index is an unmanaged index used as a broad
measure of international investment-grade bonds.
Lehman GNMA Index is an unmanaged index of Government National Mortgage
Association bonds.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
Russell 2000 Index is an unmanaged index of common stocks that generally
measure performance of small to midsize companies within the Russell
3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures by calling Putnam's
Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, the fund will file a
complete schedule of its portfolio holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. Shareholders may
obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In
addition, the fund's Forms N-Q may be reviewed and copied at the SEC's
public reference room in Washington, D.C. You may call the SEC at
1-800-SEC-0330 for information about the SEC's Web site or the operation
of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Report of Independent Registered Public Accounting Firm,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
Statement of changes in net assets shows how the fund's net assets were
affected by the fund's net investment gain or loss, by distributions to
shareholders, and by changes in the number of the fund's shares. It
lists distributions and their sources (net investment income or realized
capital gains) over the current reporting period and the most recent
fiscal year-end. The distributions listed here may not match the sources
listed in the Statement of operations because the distributions are
determined on a tax basis and may be paid in a different period from the
one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
Report of Independent Registered
Public Accounting Firm
To the Trustees and Shareholders of
Putnam Tax-Free Insured Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam
Tax-Free Insured Fund (the "fund") at July 31, 2004, and the results of
its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at July 31, 2004, by correspondence
with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 10, 2004
The fund's portfolio
July 31, 2004
Key to Abbreviations
- -------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FNMA Coll. Federal National Mortgage Association Collateralized
FSA Financial Security Assurance
GNMA Coll. Government National Mortgage Association Collateralized
G.O. Bonds General Obligation Bonds
MBIA MBIA Insurance Company
PSFG Permanent School Fund Guaranteed
RAN Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
XLCA XL Capital Assurance
Municipal bonds and notes (99.6%) (a)
Principal amount Rating (RAT) Value
Alabama (2.8%)
- -------------------------------------------------------------------------------
$3,000,000 Alabama A&M U. Rev. Bonds, MBIA,
6 1/2s, 11/1/25 Aaa $3,236,250
7,500,000 Jefferson Cnty., Swr. Rev. Bonds,
FGIC, 5 3/4s, 2/1/38 AAA 8,418,750
--------------
11,655,000
Alaska (2.8%)
- -------------------------------------------------------------------------------
AK State Hsg. Fin. Corp. Rev. Bonds,
Ser. A
6,000,000 MBIA, 5.9s, 12/1/19 Aaa 6,172,500
4,945,000 4.4s, 12/1/31 Aaa 5,093,350
--------------
11,265,850
Arkansas (0.5%)
- -------------------------------------------------------------------------------
2,000,000 Little Rock G.O. Bonds (Cap. Impt.),
FSA, 3.95s, 4/1/19 Aaa 1,950,000
California (10.1%)
- -------------------------------------------------------------------------------
2,105,000 Alvord, G.O. Bonds, Ser. A, MBIA,
5.9s, 2/1/20 Aaa 2,465,481
12,000,000 CA State Dept. of Wtr. Resources
Rev. Bonds, Ser. A, AMBAC, 5 1/2s,
5/1/13 Aaa 13,425,000
1,000,000 CA State Econ. Recvy. G.O. Bonds,
Ser. A, MBIA, 5s, 7/1/12 Aaa 1,092,500
3,000,000 CA Statewide Cmnty. Dev. Auth. COP
(Motion Picture & TV Fund), AMBAC,
5.35s, 1/1/24 Aaa 3,082,500
2,475,000 Golden State Tobacco Securitization
Corp. Rev. Bonds (Tobacco
Settlement), Ser. B, AMBAC, 5s,
6/1/38 Aaa 2,403,844
7,000,000 San Diego Cnty., Wtr. Auth. COP,
FGIC, 5.681s, 4/23/08 Aaa 7,770,000
2,000,000 San Diego, Unified School Dist. G.O.
Bonds (Election of 1998), Ser. E,
FSA, 5 1/4s, 7/1/19 Aaa 2,152,500
3,680,000 Santa Ana, Fin. Auth. Lease
Rev. Bonds (Police Admin. & Hldg.
Fac.), Ser. A, MBIA, 6 1/4s, 7/1/17 Aaa 4,452,800
3,905,000 Vallejo City, Unified School Dist.
G.O. Bonds, Ser. A, MBIA, 5.9s,
2/1/22 Aaa 4,568,850
--------------
41,413,475
Colorado (2.8%)
- -------------------------------------------------------------------------------
1,000,000 CO Dept. of Trans. RAN, 6s, 6/15/06 Aaa 1,073,750
689,000 CO Hlth. Fac. Auth. Rev. Bonds
(Cmnty. Provider Pooled Loan
Program), Ser. A, FSA, 7 1/4s,
7/15/17 Aaa 691,177
5,000,000 Denver, City & Cnty. Arpt.
Rev. Bonds, MBIA, 5 1/2s, 11/15/25 Aaa 5,231,250
4,000,000 Weld Cnty. School Dist. G.O. Bonds,
FSA, 5 1/2s, 12/1/19 Aaa 4,375,000
--------------
11,371,177
District of Columbia (1.0%)
- -------------------------------------------------------------------------------
1,000,000 DC COP, AMBAC, 5 1/4s, 1/1/09 AAA 1,078,750
3,000,000 DC G.O. Bonds, Ser. A, FSA, 5 7/8s,
6/1/05 Aaa 3,107,910
--------------
4,186,660
Florida (7.3%)
- -------------------------------------------------------------------------------
13,675,000 Hernando Cnty., Rev. Bonds (Criminal
Justice Complex Fin.), FGIC, 7.65s,
7/1/16 Aaa 18,239,031
5,000,000 Orlando & Orange Cnty., Expressway
Auth. Rev. Bonds, FGIC, 8 1/4s,
7/1/14 Aaa 6,750,000
3,935,000 Sumter Cnty., School Dist.
Rev. Bonds (Multi Dist. Loan
Program), FSA, 7.15s, 11/1/15 Aaa 5,041,719
--------------
30,030,750
Georgia (1.7%)
- -------------------------------------------------------------------------------
3,360,000 Fulton Cnty., Dev. Auth. Rev. Bonds
(Klaus Pkg. & Fam. Hsg. Project),
MBIA, 5 1/4s, 11/1/20 Aaa 3,603,600
415,000 GA Muni. Elec. Pwr. Auth.
Rev. Bonds, Ser. Y, AMBAC, 6.4s,
1/1/13 Aaa 489,700
2,500,000 Muni. Elec. Auth. Rev. Bonds, AMBAC,
5s, 1/1/26 Aaa 2,681,250
--------------
6,774,550
Illinois (7.5%)
- -------------------------------------------------------------------------------
5,500,000 Chicago, G.O. Bonds, Ser. A, AMBAC,
5 5/8s, 1/1/39 Aaa 5,781,875
Chicago, Board of Ed. G.O. Bonds,
Ser. A
2,000,000 FGIC, 5 1/4s, 12/1/20 Aaa 2,215,000
1,500,000 MBIA, 5 1/4s, 12/1/19 Aaa 1,595,625
4,385,000 Cook Cnty., G.O. Bonds, Ser. D,
AMBAC, 5 1/4s, 11/15/21 Aaa 4,615,212
1,000,000 Du Page Cnty., Cmnty. High School
Dist. G.O. Bonds (Dist. No. 108 -
Lake Park), FSA, 5.6s, 1/1/20 Aaa 1,091,250
5,000,000 IL G.O. Bonds, Ser. 1, MBIA, 5 1/4s,
10/1/19 Aaa 5,325,000
3,000,000 IL State G.O. Bonds, FGIC, 6s,
11/1/26 Aaa 3,480,000
5,000,000 Regl. Trans. Auth. Rev. Bonds,
Ser. A, AMBAC, 8s, 6/1/17 Aaa 6,668,750
--------------
30,772,712
Indiana (4.5%)
- -------------------------------------------------------------------------------
Brownsburg Ind. 1999 School Bldg.
Corp. Rev. Bonds (1st Mtge.),
Ser. A, FSA
3,465,000 5 1/4s, 9/15/19 AAA 3,707,550
3,295,000 5 1/4s, 9/15/18 AAA 3,542,125
6,605,000 Center Grove, Bldg. Rev. Bonds,
AMBAC, 5 1/2s, 1/15/26 Aaa 6,877,455
1,000,000 Evansville Vanderburgh Pub. Leasing
Corp. Rev. Bonds (1st Mtge.), MBIA,
5 3/4s, 7/15/18 Aaa 1,105,000
3,135,000 IN Bond Bk. Common School
Rev. Bonds, AMBAC, 5s, 2/1/06 Aaa 3,276,075
--------------
18,508,205
Louisiana (3.3%)
- -------------------------------------------------------------------------------
57,113 East Baton Rouge, Mtge. Fin. Auth.
Rev. Bonds (Single Fam.), Ser. B,
GNMA Coll., 8 1/4s, 2/25/11 AAA 57,328
5,730,000 Ernest N. Morial-New Orleans Exhibit
Hall Auth. Special Tax, AMBAC, 5s,
7/15/20 AAA 6,023,662
3,000,000 LA Rev. Bonds, Ser. A, AMBAC,
5 3/8s, 6/1/19 Aaa 3,225,000
4,000,000 LA State U. & Agriculture &
Mechanical College Rev. Bonds, MBIA,
5 1/2s, 7/1/26 Aaa 4,175,000
--------------
13,480,990
Massachusetts (3.4%)
- -------------------------------------------------------------------------------
MA State Special Oblig. Dedicated
Tax Rev. Bonds, FGIC
1,000,000 5 1/4s, 1/1/24 Aaa 1,045,000
1,000,000 5 1/4s, 1/1/23 Aaa 1,051,250
11,000,000 5 1/4s, 1/1/22 Aaa 11,632,500
--------------
13,728,750
Michigan (7.7%)
- -------------------------------------------------------------------------------
720,000 Detroit, Rev. Bonds, Ser. B, FGIC,
5 1/4s, 7/1/20 Aaa 761,400
7,990,000 Detroit, City School Dist. G.O.
Bonds (School Bldg. & Site Impt.),
Ser. B, FGIC, 5s, 5/1/25 Aaa 8,049,925
7,730,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 1.10s, 7/1/33 VMIG1 7,730,000
500,000 Kent, Hosp. Fin. Auth. Rev. Bonds
(Spectrum Hlth. Care), Ser. A, MBIA,
5 1/2s, 1/15/17 AAA 545,000
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Mercy Hlth. Svcs.), Ser. A, AMBAC,
6s, 8/15/34 Aaa 5,431,250
MI State Strategic Fund, Ltd.
Rev. Bonds (Detroit Edison Co.),
AMBAC
4,000,000 7s, 5/1/21 Aaa 5,125,000
3,500,000 4.85s, 9/1/30 Aaa 3,701,250
--------------
31,343,825
Mississippi (2.0%)
- -------------------------------------------------------------------------------
4,000,000 Mississippi Dev. Bank Special Oblig.
Rev. Bonds (Cap. & Equip.), Ser. A,
AMBAC, 5 5/8s, 7/1/31 AAA 4,270,000
MS Dev. Bk. Special Obligation
Rev. Bonds (Waste Wtr. & Solid Waste
Mgt.), Ser. A, FSA
1,855,000 5 3/8s, 2/1/19 Aaa 1,991,805
1,755,000 5 3/8s, 2/1/18 Aaa 1,895,400
--------------
8,157,205
Missouri (2.6%)
- -------------------------------------------------------------------------------
10,800,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (Cox Hlth. Syst.), AMBAC,
1.15s, 6/1/22 A-1 10,800,000
Montana (0.4%)
- -------------------------------------------------------------------------------
1,725,000 Forsyth, Poll. Control Mandatory Put
Bonds (Avista Corp.), AMBAC, 5s,
12/30/08 Aaa 1,834,969
Nevada (2.1%)
- -------------------------------------------------------------------------------
8,295,000 Clark Cnty., Rev. Bonds, Ser. B,
FGIC, 5 1/4s, 7/1/20 Aaa 8,689,013
New Hampshire (1.4%)
- -------------------------------------------------------------------------------
5,000,000 NH State Tpk. Syst. Rev. Bonds,
FGIC, 6.806s, 11/1/17 Aaa 5,568,750
New Jersey (2.6%)
- -------------------------------------------------------------------------------
10,000,000 NJ Econ. Dev. Auth. Rev. Bonds
(School Fac. Construction), Ser. F,
FGIC, 5 1/4s, 6/15/21 Aaa 10,637,500
New York (3.1%)
- -------------------------------------------------------------------------------
Nassau Cnty., Hlth. Care Syst.
Rev. Bonds (Nassau Hlth. Care
Corp.), FSA
4,610,000 6s, 8/1/13 Aaa 5,261,163
2,285,000 6s, 8/1/12 Aaa 2,604,900
NY State Dorm. Auth. Rev. Bonds
(Brooklyn Law School), Ser. B, XLCA
2,270,000 5 3/8s, 7/1/22 Aaa 2,426,063
2,215,000 5 3/8s, 7/1/20 Aaa 2,394,969
--------------
12,687,095
North Carolina (3.5%)
- -------------------------------------------------------------------------------
6,000,000 Metropolitan Pier & Exposition Auth.
Rev. Bonds (McCormack Place
Expansion Project), FGIC,
5 1/2s, 12/15/24 Aaa 6,330,000
7,500,000 NC State Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.), Ser. A,
MBIA, 5 1/4s, 1/1/19 AAA 7,978,125
--------------
14,308,125
Ohio (2.4%)
- -------------------------------------------------------------------------------
6,765,000 Cleveland, Wtr. Wks. Rev. Bonds,
Ser. J, FSA, 5s, 1/1/06 Aaa 7,060,969
1,000,000 Cleveland-Cuyahoga Cnty., Port.
Auth. Rev. Bonds (Rock & Roll Hall
of Fame), FSA, 3.6s, 12/1/14 Aaa 1,000,190
1,535,000 Morley Library Dist. G.O. Bonds
(Lake Cnty. Dist. Library), AMBAC,
5 1/4s, 12/1/19 Aaa 1,646,288
45,000 OH Hsg. Fin. Agcy. Single Fam. Mtge.
Rev. Bonds, Ser. 85-A, FGIC, zero %,
1/15/15 Aaa 16,031
--------------
9,723,478
Oklahoma (0.8%)
- -------------------------------------------------------------------------------
3,000,000 OK City Arpt. Trust Rev. Bonds,
Ser. A, FSA, 5 1/4s, 7/1/21 Aaa 3,112,500
Oregon (0.5%)
- -------------------------------------------------------------------------------
1,880,000 Salem-Keizer, School Dist. G.O.
Bonds (No. 24J), FSA, 4s, 6/15/06 Aaa 1,948,150
Pennsylvania (3.5%)
- -------------------------------------------------------------------------------
PA State Pub. School Bldg. Auth.
Rev. Bonds
1,750,000 (Philadelphia School Dist.), FSA,
5 1/2s, 6/1/28 Aaa 1,900,938
3,000,000 (Philadelphia School Dist.), 5 1/4s,
6/1/25 Aaa 3,108,750
Philadelphia, School Dist. G.O.
Bonds, Ser. A, FSA
6,400,000 5 1/2s, 2/1/31 Aaa 7,216,000
2,000,000 5 1/2s, 2/1/18 Aaa 2,255,000
--------------
14,480,688
Texas (10.2%)
- -------------------------------------------------------------------------------
2,500,000 Dallas, Indpt. School Dist. G.O.
Bonds, PSFG, 5 1/4s, 2/15/19 Aaa 2,656,250
1,250,000 Harris Cnty., Mandatory Put Bonds
(Toll Road), FGIC, 5s, 8/15/09 Aaa 1,350,000
5,280,000 Houston, Arpt. Syst. Rev. Bonds,
FSA, 5s, 7/1/21 Aaa 5,418,600
1,000,000 Houston, Cmnty. College Syst.
Rev. Bonds (Student Fee), MBIA,
5.1s, 4/15/06 Aaa 1,050,000
North Central TX Hlth. Fac. Dev.
Corp. VRDN
4,290,000 (Dates Hosp. Prsbytrn Med. Ctr),
Ser. C, MBIA, 1.08s, 12/1/15 VMIG1 4,290,000
5,100,000 (Hosp. Presbyterian Med. Ctr.),
Ser. D, MBIA, 1.08s, 12/1/15 VMIG1 5,100,000
4,000,000 San Antonio Wtr. Rev. Bonds, FSA,
5 1/2s, 5/15/20 Aaa 4,325,000
8,000,000 San Antonio, Hotel Occupancy
Mandatory Put Bonds, Ser. B, AMBAC,
5s, 8/15/08 Aaa 8,640,000
5,000,000 Tarrant Cnty., Hlth. Fac. Dev.
Rev. Bonds (TX Hlth. Res. Sys.),
Ser. A, MBIA, 5 3/4s, 2/15/15 Aaa 5,625,000
3,150,000 Victoria G.O. Bonds, FGIC, 5 1/2s,
8/15/20 Aaa 3,402,000
--------------
41,856,850
Utah (3.3%)
- -------------------------------------------------------------------------------
UT State Pwr. Supply Rev. Bonds
(Intermountain Pwr. Agcy.), Ser. A,
MBIA
7,900,000 6.15s, 7/1/14 (prerefunded) Aaa 8,620,875
4,495,000 6.15s, 7/1/14 Aaa 4,899,550
--------------
13,520,425
Washington (5.8%)
- -------------------------------------------------------------------------------
10,000,000 Port of Seattle Rev. Bonds, Ser. A,
FGIC, 5 1/2s, 10/1/22 Aaa 10,712,500
WA State Pub. Pwr. Supply Syst.
Rev. Bonds
6,000,000 (Nuclear No. 3), Ser. B, MBIA,
7 1/8s, 7/1/16 Aaa 7,567,500
5,000,000 (Nuclear No. 1), Ser. A, AMBAC,
5.7s, 7/1/09 Aaa 5,393,750
--------------
23,673,750
- -------------------------------------------------------------------------------
Total Investments
(cost $389,048,642) $407,480,442
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $409,310,843.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at July 31, 2004 for the securities
listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at July 31, 2004. Ratings are not covered by the Report of
Independent Registered Public Accounting Firm.
The rates shown on VRDN are the current interest rates shown at July 31,
2004.
The fund had the following industry group concentrations greater than
10% at July 31, 2004 (as a percentage of net assets):
Utilities 22.6%
Transportation 11.7
The fund had the following insurance concentrations greater than 10% at
July 31, 2004 (as a percentage of net assets):
FGIC 28.4%
AMBAC 27.0
MBIA 21.7
FSA 19.6
The dates shown on Mandatory Put Bonds are the next Mandatory Put dates.
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
July 31, 2004
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$389,048,642) (Note 1) $407,480,442
- -------------------------------------------------------------------------------
Cash 997,044
- -------------------------------------------------------------------------------
Interest and other receivables 3,863,535
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 8,621
- -------------------------------------------------------------------------------
Total assets 412,349,642
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 430,957
- -------------------------------------------------------------------------------
Payable for securities purchased 1,089,148
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 797,416
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 344,252
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 90,904
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 58,180
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 754
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 138,797
- -------------------------------------------------------------------------------
Other accrued expenses 88,391
- -------------------------------------------------------------------------------
Total liabilities 3,038,799
- -------------------------------------------------------------------------------
Net assets $409,310,843
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $391,599,358
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 177,935
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (898,250)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 18,431,800
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $409,310,843
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($287,528,081divided by 19,273,831 shares) $14.92
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $14.92)* $15.62
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($110,497,695 divided by 7,395,905 shares)** $14.94
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($10,096,734 divided by 675,621 shares)** $14.94
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,188,333 divided by 79,441 shares) $14.96
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $14.96)*** $15.46
- -------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or
more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial
statements.
Statement of operations
Year ended July 31, 2004
Interest income: $20,386,706
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,352,992
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 554,164
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 18,600
- -------------------------------------------------------------------------------
Administrative services (Note 2) 8,805
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 654,763
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,110,649
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 118,319
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,184
- -------------------------------------------------------------------------------
Non-recurring costs (Note 5) 7,417
- -------------------------------------------------------------------------------
Costs assumed by Manager (Note 5) (7,417)
- -------------------------------------------------------------------------------
Other 132,330
- -------------------------------------------------------------------------------
Total expenses 4,957,806
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (43,432)
- -------------------------------------------------------------------------------
Net expenses 4,914,374
- -------------------------------------------------------------------------------
Net investment income 15,472,332
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,042,151
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 4,246,111
- -------------------------------------------------------------------------------
Net gain on investments 9,288,262
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $24,760,594
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Year ended July 31
Decrease in net assets 2004 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $15,472,332 $19,790,355
- -------------------------------------------------------------------------------
Net realized gain on investments 5,042,151 9,620,709
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 4,246,111 (15,397,222)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 24,760,594 14,013,842
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
Class A (155,348) --
- -------------------------------------------------------------------------------
Class B (63,444) --
- -------------------------------------------------------------------------------
Class C (5,724) --
- -------------------------------------------------------------------------------
Class M (621) --
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (11,278,226) (14,369,544)
- -------------------------------------------------------------------------------
Class B (3,653,149) (5,127,156)
- -------------------------------------------------------------------------------
Class C (313,118) (404,425)
- -------------------------------------------------------------------------------
Class M (45,600) (74,312)
- -------------------------------------------------------------------------------
From net realized short-term gain on investments
Class A (1,116,737) (1,102,803)
- -------------------------------------------------------------------------------
Class B (456,430) (484,680)
- -------------------------------------------------------------------------------
Class C (41,167) (39,443)
- -------------------------------------------------------------------------------
Class M (4,466) (6,442)
- -------------------------------------------------------------------------------
From net realized long-term gain on investments
Class A (4,339,321) (7,592,845)
- -------------------------------------------------------------------------------
Class B (1,773,555) (3,337,034)
- -------------------------------------------------------------------------------
Class C (159,963) (271,570)
- -------------------------------------------------------------------------------
Class M (17,352) (44,356)
- -------------------------------------------------------------------------------
Increase (decrease) from capital share
transactions (Note 4) (126,651,035) 4,531,446
- -------------------------------------------------------------------------------
Total decrease in net assets (125,314,662) (14,309,322)
Net assets
- -------------------------------------------------------------------------------
Beginning of year 534,625,505 548,934,827
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $177,935 and $7,773,
respectively) $409,310,843 $534,625,505
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.93 $15.46 $15.18 $14.52 $14.72
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .53 .58 .67 .71 .73
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .25 (.16) .27 .66 (.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .78 .42 .94 1.37 .53
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.53) (.59) (.66) (.71) (.73)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.79) (.95) (.66) (.71) (.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.92 $14.93 $15.46 $15.18 $14.52
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.20 2.71 6.38 9.63 3.86
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $287,528 $368,419 $363,096 $322,302 $260,637
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .85 .84 .82 .83 .81
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.49 3.76 4.39 4.74 5.15
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.95 $15.48 $15.20 $14.54 $14.74
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .48 .59 .65 .68
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 (.16) .27 .66 (.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .68 .32 .86 1.31 .48
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.49) (.58) (.65) (.68)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.69) (.85) (.58) (.65) (.68)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.94 $14.95 $15.48 $15.20 $14.54
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.52 2.04 5.81 9.18 3.44
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $110,498 $150,266 $171,801 $196,934 $238,508
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.50 1.49 1.35 1.23 1.21
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.83 3.10 3.86 4.34 4.75
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.95 $15.49 $15.21 $14.53 $14.72
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .41 .46 .55 .59 .62
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .25 (.17) .27 .68 (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .66 .29 .82 1.27 .43
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.41) (.47) (.54) (.59) (.62)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.67) (.83) (.54) (.59) (.62)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.94 $14.95 $15.49 $15.21 $14.53
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.40 1.82 5.53 8.89 3.11
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,097 $13,793 $11,885 $9,638 $1,123
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.65 1.64 1.62 1.63 1.61
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.69 2.95 3.58 3.88 4.33
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ---------------------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.97 $15.50 $15.22 $14.56 $14.76
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .49 .54 .62 .66 .69
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 (.16) .28 .67 (.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .73 .38 .90 1.33 .49
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.48) (.55) (.62) (.67) (.69)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.74) (.91) (.62) (.67) (.69)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.96 $14.97 $15.50 $15.22 $14.56
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.93 2.40 6.05 9.28 3.55
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,188 $2,148 $2,154 $1,696 $2,692
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.15 1.14 1.12 1.13 1.11
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.19 3.45 4.08 4.45 4.82
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
July 31, 2004
Note 1
Significant accounting policies
Putnam Tax-Free Insured Fund (the "fund") is a series of Putnam Tax-Free
Income Trust (the "trust"), a Massachusetts business trust, which is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The fund pursues
its objective of seeking high current income exempt from federal income
tax by investing in tax exempt securities that are covered by insurance
guaranteeing the timely payment of principal and interest, are rated AAA
or Aaa, or are backed by the U.S. government.
The fund offers class A, class B, class C and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. Prior to
January 28, 2004, the maximum front-end sales charge for class A shares
was 4.75%. Class B shares, which convert to class A shares after
approximately eight years, do not pay a front-end sales charge but pay a
higher ongoing distribution fee than class A and class M shares but
lower than class C shares, and are subject to a contingent deferred
sales charge, if those shares are redeemed within six years of purchase.
Class C shares have a higher ongoing distribution fee than class A,
class B, and class M shares, do not pay front-end sales charge but have
a one-year 1.00% contingent deferred sales charge and do not convert to
class A shares. Class M shares are sold with a maximum front-end sales
charge of 3.25% and pay an ongoing distribution fee that is higher than
class A shares but lower than class B and class C shares.
Effective April 19, 2004 (May 3, 2004 for defined contribution plans
administered by Putnam) a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase. The redemption fee is accounted for as an
addition to paid-in-capital.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are valued at fair
value on the basis of valuations provided by an independent pricing
service, approved by the Trustees. Such services use information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Other investments, including restricted
securities, are valued at fair value following procedures approved by
the Trustees. Such valuations and procedures are reviewed periodically
by the Trustees.
B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis. The premium in
excess of the call price, if any, is amortized to the call date;
thereafter, any remaining premium is amortized to maturity.
C) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund would maintain an asset
coverage ratio of at least 300% and that borrowings would not exceed
prospectus limitations. For the period ended August 6, 2003 the fund had
no borrowings against the line of credit. Effective August 6, 2003, the
fund no longer participated in a committed line of credit.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986 (the "Code"), as amended.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences include
temporary and permanent differences of losses on wash sale transactions,
dividends payable, market discount and straddle loss deferrals.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended July 31,
2004, the fund reclassified $213,060 to decrease distribution in excess
of net investment income with an increase to accumulated net realized
losses of $213,060.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $19,748,113
Unrealized depreciation (1,316,451)
------------
Net unrealized appreciation 18,431,662
Undistributed tax exempt inco 605,538
Undistributed short-term gain 664,261
Undistributed long-term gain 833,998
Cost for federal income
tax purposes $389,048,780
F) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among and charged to the assets of each
fund on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the lesser of (i) an annual rate of 0.50% of the average net
asset value of the fund or (ii) the following annual rates: 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million, 0.45% of the next $500 million, 0.40% of the next $5 billion,
0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34% of
the next $5 billion and 0.33% thereafter.
Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary, bear other expenses) through
December 31, 2004, to the extent that the fund's net expenses as a
percentage of average net assets exceed the average expense ratio for
the fund's Lipper peer group of front-end load funds.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the year ended July 31, 2004, the fund
paid PFTC $502,032 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the year ended July 31, 2004, the
fund's expenses were reduced by $43,432 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $715 as a quarterly retainer, has been allocated to the fund, and
an additional fee for each Trustees meeting attended. Trustees receive
additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee compensation and expenses in the
statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the statement of assets
and liabilities. The Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C and class M shares pursuant to rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, Inc., for services provided
and expenses incurred in distributing shares of the fund. The Plans
provide for payments by the fund to Putnam Retail Management at an
annual rate of up to 0.35%, 1.00%, 1.00%, and 1.00% of the average net
assets attributable to class A, class B, class C and class M shares,
respectively. The Trustees have approved payment by the fund at the
annual rates of 0.20%, 0.85%, 1.00% and 0.50% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.
For the year ended July 31, 2004, Putnam Retail Management, acting as
underwriter, received net commissions of $5,728 and $98 from the sale of
class A and class M shares, respectively, and received $343,640 and
$7,229 in contingent deferred sales charges from redemptions of class B
and class C shares, respectively.
A deferred sales charge of up to 1.00% is assessed on certain
redemptions of class A shares that were purchased without an initial
sales charge as part of an investment of $1 million or more. For the
year ended July 31, 2004, Putnam Retail Management, acting as
underwriter, received $24,804 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 2004, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $115,053,299 and $255,005,184, respectively. There were no
purchases or sales of U.S. government securities.
Note 4
Capital shares
At July 31, 2004, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 1,526,106 $22,970,728
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 806,782 12,201,957
- ----------------------------------------------------------------
2,332,888 35,172,685
Shares repurchased (7,736,415) (116,948,642)
- ----------------------------------------------------------------
Net decrease (5,403,527) $(81,775,957)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 5,792,511 $89,388,859
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 632,380 9,775,790
- ----------------------------------------------------------------
6,424,891 99,164,649
Shares repurchased (5,234,878) (81,026,185)
- ----------------------------------------------------------------
Net increase 1,190,013 $18,138,464
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 312,701 $4,732,438
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 261,180 3,956,188
- ----------------------------------------------------------------
573,881 8,688,626
Shares repurchased (3,227,983) (48,853,704)
- ----------------------------------------------------------------
Net decrease (2,654,102) $(40,165,078)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 1,840,319 $28,474,156
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 193,767 3,000,465
- ----------------------------------------------------------------
2,034,086 31,474,621
Shares repurchased (3,081,309) (47,565,208)
- ----------------------------------------------------------------
Net decrease (1,047,223) $(16,090,587)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 72,319 $1,100,638
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 27,782 420,728
- ----------------------------------------------------------------
100,101 1,521,366
Shares repurchased (346,772) (5,260,747)
- ----------------------------------------------------------------
Net decrease (246,671) $(3,739,381)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 469,861 $7,304,731
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 19,513 302,204
- ----------------------------------------------------------------
489,374 7,606,935
Shares repurchased (334,567) (5,197,211)
- ----------------------------------------------------------------
Net increase 154,807 $2,409,724
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 4,299 $64,701
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,905 59,209
- ----------------------------------------------------------------
8,204 123,910
Shares repurchased (72,228) (1,094,529)
- ----------------------------------------------------------------
Net decrease (64,024) $(970,619)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 24,513 $380,235
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,962 61,418
- ----------------------------------------------------------------
28,475 441,653
Shares repurchased (23,949) (367,808)
- ----------------------------------------------------------------
Net increase 4,526 $73,845
- ----------------------------------------------------------------
Note 5
Regulatory matters and litigation
On April 8, 2004, Putnam Management entered into agreements with the
Securities and Exchange Commission ("SEC") and the Massachusetts
Securities Division representing a final settlement of all charges
brought against Putnam Management by those agencies on October 28, 2003
in connection with excessive short-term trading by Putnam employees and,
in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans. The
settlement with the SEC requires Putnam Management to pay $5 million in
disgorgement plus a civil monetary penalty of $50 million, and the
settlement with the Massachusetts Securities Division requires Putnam
Management to pay $5 million in restitution and an administrative fine
of $50 million. The settlements also leave intact the process
established under an earlier partial settlement with the SEC under which
Putnam Management agreed to pay the amount of restitution determined by
an independent consultant, which may exceed the disgorgement and
restitution amounts specified above, pursuant to a plan to be developed
by the independent consultant.
Putnam Management, and not the investors in any Putnam fund, will bear
all costs, including restitution, civil penalties and associated legal
fees stemming from both of these proceedings. The SEC's and
Massachusetts Securities Division's allegations and related matters also
serve as the general basis for numerous lawsuits, including purported
class action lawsuits filed against Putnam Management and certain
related parties, including certain Putnam funds. Putnam Management has
agreed to bear any costs incurred by Putnam funds in connection with
these lawsuits. Based on currently available information, Putnam
Management believes that the likelihood that the pending private
lawsuits and purported class action lawsuits will have a material
adverse financial impact on the fund is remote, and the pending actions
are not likely to materially affect its ability to provide investment
management services to its clients, including the Putnam funds. For the
period ended July 31, 2004, Putnam Management has assumed $7,417 of
legal, shareholder servicing and communication, audit, and Trustee fees
incurred by the fund in connection with these matters.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. The fund may experience increased redemptions as a result
of these matters, which could result in increased transaction costs and
operating expenses.
Federal tax information
(Unaudited)
The fund has designated 98.55% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $3,031,493 as long term capital gain, for its
taxable year ended July 31, 2004.
The Form 1099 you receive in January 2005 will show the tax status of
all distributions paid to your account in calendar 2004.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
Ms. Baxter is the President of Baxter Associates, Inc., a private
investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta
Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a
steel service corporation), Advocate Health Care and BoardSource,
formerly the National Center for Nonprofit Boards. She is Chairman
Emeritus of the Board of Trustees, Mount Holyoke College, having served
as Chairman for five years and as a board member for thirteen years.
Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a
manufacturer of energy control products).
Ms. Baxter has held various positions in investment banking and
corporate finance, including Vice President and Principal of the Regency
Group, and Vice President of and Consultant to First Boston Corporation.
She is a graduate of Mount Holyoke College.
Charles B. Curtis (4/27/40), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear
Threat Initiative (a private foundation dealing with national security
issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the
Trustee Advisory Council of the Applied Physics Laboratory, Johns
Hopkins University. Until 2003, Mr. Curtis was a member of the Electric
Power Research Institute Advisory Council and the University of Chicago
Board of Governors for Argonne National Laboratory. Prior to 2002, Mr.
Curtis was a Member of the Board of Directors of the Gas Technology
Institute and the Board of Directors of the Environment and Natural
Resources Program Steering Committee, John F. Kennedy School of
Government, Harvard University. Until 2001, Mr. Curtis was a member of
the Department of Defense Policy Board and Director of EG&G Technical
Services, Inc. (a fossil energy research and development support
company).
From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan &
Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr.
Curtis was Deputy Secretary of Energy. He served as Chairman of the
Federal Energy Regulatory Commission from 1977 to 1981 and has held
positions on the staff of the U.S. House of Representatives, the U.S.
Treasury Department, and the SEC.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity
buyout firm that specializes in energy investments in the diversified
worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil
Company, Continuum Health Partners of New York and various private
companies controlled by First Reserve Corporation, as well as a Trustee
of TH Lee, Putnam Investment Trust (a closed-end investment company
advised by an affiliate of Putnam Management). He is also a Trustee of
Sarah Lawrence College.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held
executive positions in investment banking and investment management with
several firms and with the federal government, including Deputy
Associate Director of the Office of Management and Budget and Deputy
Director of the Federal Energy Administration. He is active in various
business associations, including the Economic Club of New York, and
lectures on energy issues in the United States and Europe. Mr. Hill
holds a B.A. degree in Economics from Southern Methodist University and
pursued graduate studies there as a Woodrow Wilson Fellow.
Ronald J. Jackson (12/17/43), Trustee since 1996
Mr. Jackson is a private investor.
Mr. Jackson is President of the Kathleen and Ronald J. Jackson
Foundation (a charitable trust). He is also a member of the Board of
Overseers of WGBH (a public television and radio station) as well as a
member of the Board of Overseers of the Peabody Essex Museum.
Mr. Jackson is the former Chairman, President and Chief Executive
Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he
retired in 1993. He previously served as President and Chief Executive
Officer of Stride-Rite, Inc. (a manufacturer and distributor of
footwear) and of Kenner Parker Toys, Inc. (a major toy and game
manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor
of women's apparel) and has held financial and marketing positions with
General Mills, Inc. and Parker Brothers (a toy and game company). Mr.
Jackson is a graduate of the University of Michigan Business School.
Paul L. Joskow (6/30/47), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and
Management, and Director of the Center for Energy and Environmental
Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid Transco (a UK-based
holding company with interests in electric and gas transmission and
distribution and telecommunications infrastructure) and TransCanada
Corporation (an energy company focused on natural gas transmission and
power services). He also serves on the board of the Whitehead Institute
for Biomedical Research (a non-profit research institution) and has been
President of the Yale University Council since 1993. Prior to February
2002, he was a Director of State Farm Indemnity Company (an automobile
insurance company), and, prior to March 2000, he was a Director of New
England Electric System (a public utility holding company).
Dr. Joskow has published five books and numerous articles on topics in
industrial organization, government regulation of industry, and
competition policy. He is active in industry restructuring,
environmental, energy, competition and privatization policies -- serving
as an advisor to governments and corporations worldwide. Dr. Joskow
holds a Ph.D. and M. Phil from Yale University and B.A. from Cornell
University.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and
cattle breeding). She is President Emeritus of Mount Holyoke College.
Dr. Kennan served as Chairman and is now Lead Director of Northeast
Utilities and is a Director of Talbots, Inc. She has served as Director
on a number of other boards, including Bell Atlantic, Chastain Real
Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life
Insurance. She is a Trustee of the National Trust for Historic
Preservation, of Centre College and of Midway College in Midway,
Kentucky. She is also a member of The Trustees of Reservations. Dr.
Kennan has served on the oversight committee of the Folger Shakespeare
Library, as President of Five Colleges Incorporated, as a Trustee of
Notre Dame University and is active in various educational and civic
associations.
As a member of the faculty of Catholic University for twelve years,
until 1978, Dr. Kennan directed the post-doctoral program in Patristic
and Medieval Studies, taught history and published numerous articles.
Dr. Kennan holds a Ph.D. from the University of Washington in Seattle,
an M.S. from St. Hilda's College at Oxford University and an A.B. from
Mount Holyoke College. She holds several honorary doctorates.
John H. Mullin, III (6/15/41), Trustee since 1997
Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).
Mr. Mullin serves as a Director of The Liberty Corporation (a
broadcasting company), Progress Energy, Inc. (a utility company,
formerly known as Carolina Power & Light) and Sonoco Products, Inc. (a
packaging company). Mr. Mullin is Trustee Emeritus of The National
Humanities Center and Washington & Lee University, where he served as
Chairman of the Investment Committee. Prior to May 2001, he was a
Director of Graphic Packaging International Corp. Prior to February
2004, he was a Director of Alex Brown Realty, Inc.
Mr. Mullin is also a past Director of Adolph Coors Company; ACX
Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.;
Fisher-Price, Inc.; and The Ryland Group, Inc. Mr. Mullin is a graduate
of Washington & Lee University and The Wharton Graduate School,
University of Pennsylvania.
Robert E. Patterson (3/15/45), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc.
Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a
Director of Brandywine Trust Company. Prior to June 2003, he was a
Trustee of Sea Education Association. Prior to December 2001, he was
President and Trustee of Cabot Industrial Trust (a publicly traded real
estate investment trust). Prior to February 1998, he was Executive Vice
President and Director of Acquisitions of Cabot Partners Limited
Partnership (a registered investment adviser involved in institutional
real estate investments). And, prior to 1990, he served as Executive
Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the
predecessor company of Cabot Partners) and as a Senior Vice President of
the Beal Companies (a real estate management, investment and development
firm).
Mr. Patterson practiced law and held various positions in state
government and was the founding Executive Director of the Massachusetts
Industrial Finance Agency. Mr. Patterson is a graduate of Harvard
College and Harvard Law School.
W. Thomas Stephens (9/2/42), Trustee since 1997
Mr. Stephens serves on a number of corporate boards.
Effective November 2004, Mr. Stephens is expected to become Chief
Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and
timberland assets company). Mr. Stephens serves as a Director of Xcel
Energy Incorporated (a public utility company) and TransCanada Pipelines
Limited. Until 2004, Mr. Stephens was a Director of Qwest Communications
and Norske Canada, Inc. (a paper manufacturer). Until 2003, Mr. Stephens
was a Director of Mail-Well, Inc. (a diversified printing company). He
served as Chairman of Mail-Well until 2001 and as CEO of
MacMillan-Bloedel, Ltd. (a forest products company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of
Johns Manville Corporation. He holds B.S. and M.S. degrees from the
University of Arkansas.
George Putnam, III* (8/10/51), Trustee since 1984 and President
since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of
financial advisory and other research services), and of New Generation
Advisers, Inc. (a registered investment advisor to private funds). Mr.
Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered
investment adviser). He is a Trustee of St. Mark's School, Shore Country
Day School, and until 2002 was a Trustee of the Sea Education
Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert
LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a
graduate of Harvard College, Harvard Business School and Harvard Law
School.
A.J.C. Smith* (4/13/34), Trustee since 1986
Mr. Smith is the Chairman of Putnam Investments and Director of and
Consultant to Marsh & McLennan Companies, Inc.
Mr. Smith is also a Director of Trident Corp. (a limited partnership
with over thirty institutional investors). He is also a Trustee of the
Carnegie Hall Society, the Educational Broadcasting Corporation, and the
National Museums of Scotland. He is Chairman of the Central Park
Conservancy and a Member of the Board of Overseers of the Joan and
Sanford I. Weill Graduate School of Medical Sciences of Cornell
University. Prior to May 2000 and November 1999, Mr. Smith was Chairman
and CEO, respectively, of Marsh & McLennan Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of July 31, 2004, there were 102 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her
resignation, retirement at age 72, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the fund, Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc., the parent company of Putnam, LLC and its affiliated companies.
Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue
of their positions as officers of the fund, Putnam Management, Putnam
Retail Management or Marsh & McLennan Companies, Inc. and as
shareholders of Marsh & McLennan Companies, Inc. George Putnam, III is
the President of your fund and each of the other Putnam funds. Mr. Smith
serves as a Director of and Consultant to Marsh & McLennan Companies,
Inc. and as Chairman of Putnam Investments.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Associate Treasurer and Principal
Executive Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Jonathan S. Horwitz (6/4/55)
Senior Vice President and Treasurer
Since 2004
Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Senior Managing Director, Putnam Investments. Prior to July
2001, Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Daniel T. Gallagher (2/27/62)
Vice President and Legal and Compliance Liaison Officer
Since 2004
Vice President, Putnam Investments. Prior to 2004,
Associate, Ropes & Gray LLP; prior to 2000, Law Clerk,
Massachusetts Supreme Judicial Court
Francis J. McNamara, III (8/19/55)
Vice President and Chief Legal Officer
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2004, General Counsel,
State Street Research & Management Company
James P. Pappas (2/24/53)
Vice President
Since 2004
Managing Director, Putnam Investments and Putnam Management.
From 2001 to 2002, Chief Operating Officer, Atalanta/Sosnoff
Management Corporation; prior to 2001, President and Chief
Executive Officer, UAM Investment Services, Inc.
Richard S. Robie, III (3/30/60)
Vice President
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2003, Senior Vice
President, United Asset Management Corporation
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square,
Boston, MA 02109.
Putnam puts your interests first
In January, Putnam announced a number of voluntary initiatives designed
to reduce fund expenses, provide investors with more useful information,
and help safeguard the interests of all Putnam investors. For details,
visit www.putnaminvestments.com.
Cost-cutting initiatives
Reduced sales charges
Effective immediately, the maximum sales charge for class A
shares has been reduced to 5.25% for equity funds (formerly
5.75%) and 4.50% for most income funds (formerly 4.75%).*
Lower class B purchase limit
To help ensure that investors are in the most cost-effective
share class, the maximum amount that can be invested in
class B shares has been reduced to $100,000. (Larger trades
or accumulated amounts will be directed to class A shares.)
Ongoing expenses will be limited
During calendar 2004, total ongoing expenses, including management fees
for all funds, will be maintained at or below the average of each fund's
industry peers in its Lipper load-fund universe. For more information,
please see the Statement of Additional information.
Additional measures are being taken to reduce expenses for shareholders
in the six global and international funds that had short-term trading
issues.
Improved disclosure
Putnam fund prospectuses and shareholder reports are being revised to
disclose additional information that will help shareholders compare
funds and weigh their costs and risks along with their potential
benefits. Shareholders will find easy-to-understand information about
fund expense ratios, portfolio manager compensation, risk comparisons,
brokerage commissions, and employee and trustee ownership of Putnam
funds. Disclosure of breakpoint discounts is also being enhanced to
alert investors to potential cost savings.
Protecting investors' interests
New short-term trading fee introduced
To discourage short-term trading, which can interfere with a fund's
long-term strategy, a 2% short-term trading fee will be imposed on any
Putnam fund shares redeemed or exchanged within five calendar days of
purchase.
* The maximum sales charge for class A shares of Putnam
U.S. Intermediate Government Income Fund remains 3.25%.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and
Principal Executive
Officer
Jonathan S. Horwitz
Senior Vice President and Treasurer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Daniel T. Gallagher
Vice President and Legal and
Compliance Liaison Officer
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
Francis J. McNamara, III
Vice President and Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
Insured Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, the most recent copy of Putnam's
Quarterly Performance Summary, and Putnam's Quarterly Ranking Summary.
For more recent performance, please visit www.putnaminvestments.com.
Investors should carefully consider the investment objective, risks,
charges, and expenses of a fund, which are described in its prospectus.
For this and other information or to request a prospectus, call
1-800-225-1581 toll free. Please read the prospectus carefully before
investing. The fund's Statement of Additional Information contains
additional information about the fund's Trustees and is available
without charge upon request by calling 1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site
www.putnaminvestments.com.
AN043-216498 9/04
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
The following table presents fees billed in each of the last two fiscal
years for services rendered to the fund by the fund's independent
auditors:
Audit Audit-Related Tax All Other
Fiscal year ended Fees Fees Fees Fees
- ----------------- ---------- ------------- ------- ---------
July 31, 2004 $47,085* $-- $5,912 $88
July 31, 2003 $50,317 $-- $5,598 $--
* Includes fees of $ 376 billed by the fund's independent auditor to the
fund for audit procedures necessitated by regulatory and litigation
matters. These fees were reimbursed to the fund by Putnam.
For the fiscal years ended July 31, 2004 and July 31, 2003, the fund's
independent auditors billed aggregate non-audit fees in the amounts of
$139,628 and $79,193, respectively, to the fund, Putnam Management and
any entity controlling, controlled by or under common control with
Putnam Management that provides ongoing services to the fund.
Audit Fees represents fees billed for the fund's last two fiscal years.
Audit-Related Fees represents fees billed in the fund's last two fiscal
years for services traditionally performed by the fund's auditor,
including accounting consultation for proposed transactions or
concerning financial accounting and reporting standards and other audit
or attest services not required by statute or regulation.
Tax Fees represent fees billed in the fund's last two fiscal years for
tax compliance, tax planning and tax advice services. Tax planning and
tax advice services include assistance with tax audits, employee benefit
plans and requests for rulings or technical advice from taxing
authorities.
All Other Fees Fees represent fees billed for services relating to fund
expense processing.
Pre-Approval Policies of the Audit and Pricing Committee. The Audit and
Pricing Committee of the Putnam funds has determined that, as a matter
of policy, all work performed for the funds by the funds' independent
auditors will be pre-approved by the Committee and will generally not be
subject to pre-approval procedures.
Under certain circumstances, the Audit and Pricing Committee believes
that it may be appropriate for Putnam Investment Management, LLC
("Putnam Management") and certain of its affiliates to engage the
services of the funds' independent auditors, but only after prior
approval by the Committee. Such requests are required to be submitted
in writing to the Committee and explain, among other things, the nature
of the proposed engagement, the estimated fees, and why this work must
be performed by that particular audit firm. The Committee will review
the proposed engagement at its next meeting.
Since May 6, 2003, all work performed by the independent auditors for
the funds, Putnam Management and any entity controlling, controlled by
or under common control with Putnam Management that provides ongoing
services to the fund was pre-approved by the Committee or a member of
the Committee pursuant to the pre-approval policies discussed above.
Prior to that date, the Committee had a general policy to pre-approve
the independent auditor's engagements for non-audit services with the
funds, Putnam Management and any entity controlling, controlled by or
under common control with Putnam Management that provides ongoing
services to the fund.
The following table presents fees billed by the fund's principal auditor
for services required to be approved pursuant to paragraph (c)(7)(ii) of
Rule 2-01 of Regulation S-X.
Audit-Related Tax All Other Total Non-
Fiscal year ended Fees Fees Fees Audit Fees
- ----------------- ------------- ---- --------- ----------
June 30, 2004 $-- $-- $-- $--
June 30, 2003 $-- $-- $-- $--
Item 5. Audit Committee: Not applicable
- -------------------------
Items 6. Schedule of Investments: Not applicable
- ---------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal
financial officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the
registrant in this report is recorded, processed, summarized
and reported within the time periods specified in the
Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: September 27, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: September 27, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: September 27, 2004
Putnam
Tax-Free
High Yield
Fund
Item 1. Report to Stockholders:
- -------------------------------
The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-04
[GRAPHIC OMITTED: HARMONICA]
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
John A. Hill and George Putnam, III
Dear Fellow Shareholder:
Over the past several months, Putnam has introduced a number of reforms for
the benefit of shareholders, including increasing the amount of disclosure
for our funds. We would like to call your attention to new information now
being included in shareholder reports. Following the performance tables in
the Performance Summary, you can find expense and risk comparisons as well as
portfolio turnover information for your fund. The expense information lets
you estimate the amount you have paid for ongoing expenses such as management
fees and distribution (or 12b-1) fees and lets you compare these expenses
with the average expense level for your fund's peer group, as tracked by
Lipper, an independent fund-rating company. The risk comparison information
illustrates your fund's risk relative to similar funds as tracked by
Morningstar, another independent fund-rating company. The portfolio turnover
information explains how the rate at which a fund buys and sells portfolio
securities might affect its return and its taxable distributions to
shareholders. It also compares your fund's portfolio turnover rate with that
of its industry peers, as measured by Lipper. We believe all of this
information can be valuable to you and your financial advisor when you make
decisions about your financial program.
Putnam Tax-Free High Yield Fund's fiscal year, which ended July 31, 2004, was
favorable for high-yield municipal bonds and for the fund. As interest rates
drifted irregularly down and the economy generally gained in strength, bond
prices on the lower end of the quality spectrum rose more than higher-quality
issues. Furthermore, capital appreciation from two prerefunded bonds and some
hospital bond holdings enabled your fund to deliver competitive returns. In
the following pages, the management team discusses market conditions, their
strategies over the period, and their outlook for the coming months.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
September 15, 2004
Report from Fund Management
Fund highlights
* Putnam Tax-Free High Yield Fund's total return for the fiscal year
ended July 31, 2004, was 6.87% for class A shares at net asset value
(NAV) and 1.81% at public offering price (POP).
* Strong performance from two bonds that were prerefunded and from
several hospital issues helped keep the fund's NAV performance ahead of
its benchmark, the Lehman Municipal Bond Index, which returned 5.78% for
the 12-month period.
* For the same reasons, the fund's return at NAV was also slightly above
the average return for its Lipper peer group, High Yield Municipal Debt
Funds, which averaged 6.38% for the period.
* See the Performance Summary beginning on page 7 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
Market conditions generally favored high-yield bonds during the 12
months ended July 31, 2004. Interest rates drifted irregularly downward
during much of the year, sending bond prices up. Since lower-quality
bonds tend to be more sensitive to economic fluctuations, the fund's
emphasis on these bonds during most of the period provided a favorable
backdrop for strong performance. Our emphasis on bonds maturing in the
15- to 20-year range was a positive during much of the year. In
addition, appreciation from two bonds that were advance refunded and
several hospital issues helped to give the fund a performance edge. Two
health-care facility bonds detracted from performance, but overall, the
positives outweighed the negatives for the period.
FUND PROFILE
Putnam Tax-Free High Yield Fund seeks to provide a high level of current
income free from federal income tax by investing in a diversified
portfolio of lower-rated and investment-grade municipal bonds. The fund
is intended and may be appropriate for investors seeking tax-advantaged
income who are willing to accept some credit risk.
Market overview
Municipal bond yields -- which move in the opposite direction of their
prices -- were volatile throughout the fiscal year. Yields trended
irregularly downward for much of the period but corrected sharply from
mid March through mid May in response to stronger economic data, before
trending downward again toward the end of the fiscal year. As of July
31, 2004, yields on 10-year AAA-rated municipal bonds were slightly
lower than they were 12 months ago.
Overall, the yield curve, which traces the difference in yield of bonds with
different maturities, flattened during the fiscal year, as rates on bonds
maturing in the one- to five-year range rose, while rates on bonds maturing
in 15 to 30 years fell. The best-performing area of the curve was the 15-20
year range. At the same time, as confidence in the economy mounted, credit
spreads generally narrowed, which means that the difference between higher-
and lower-quality bonds diminished. The ratio of municipal bond yields to
Treasury yields fell from 92% at the beginning of the fiscal year to 84% at
year-end, after touching a low of about 80% in December.
However, surprisingly strong economic data released in March brought back
concerns about inflation. At the end of June, the Federal Reserve Board
raised the federal funds rate (the rate banks charge one another on overnight
loans) from 1.0% to 1.25%, and followed this with an increase to 1.50% just
after the end of the period. These actions, in our view, demonstrate that the
Fed is currently more concerned about maintaining orderly, non-inflationary
economic growth than it is about recession. Moreover, yields are still
historically low, and the Fed's moves have a more immediate influence on the
short end of the market than on the longer-term bonds that make up the
majority of your fund's holdings.
- -------------------------------------------------------------------------------
MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/04
- -------------------------------------------------------------------------------
Bonds
- -------------------------------------------------------------------------------
Lehman Municipal Bond Index (tax-exempt bonds) 5.78%
- -------------------------------------------------------------------------------
Lehman Aggregate Bond Index (broad bond market) 4.84%
- -------------------------------------------------------------------------------
Lehman Government Bond Index (U.S. Treasury and agency
securities) 3.86%
- -------------------------------------------------------------------------------
Lehman Intermediate Treasury Bond Index
(intermediate-maturity U.S. Treasury bonds) 2.40%
- -------------------------------------------------------------------------------
Equities
- -------------------------------------------------------------------------------
S&P 500 Index (broad stock market) 13.17%
- -------------------------------------------------------------------------------
S&P Utilities Index (utilities stocks) 21.24%
- -------------------------------------------------------------------------------
Russell 2000 Growth Index (small-company growth stocks) 11.32%
- -------------------------------------------------------------------------------
These indexes provide an overview of performance in different market
sectors for the 12 months ended 7/31/04.
- -------------------------------------------------------------------------------
Strategy overview
Adjusting the fund's duration to suit changing market conditions is one
of our risk-management tools. Duration is a measure of a fund's
sensitivity to changes in interest rates. A short duration may protect
principal when interest rates are rising, but it can reduce the fund's
appreciation potential when rates fall. In August 2003, we shifted the
portfolio from a short to a neutral duration, striving to make the fund
about equal to its benchmark in sensitivity.
We reduced the fund's duration again in the fall and winter months, as
increasing evidence of economic growth rekindled inflation concerns and
the prospect of rising interest rates. Since bond yields generally
declined in the first half of the year, a longer duration might have
benefited the fund more, in hindsight, and our move to shorten duration
in the fall proved to be somewhat premature. However, when rates spiked
dramatically in March and April, this positioning paid off. Since then,
we have allowed the fund's duration to edge back toward neutral,
although it is still slightly defensive because we expect rates to rise
further in coming months.
We took the opportunity afforded by strong demand for higher-yielding
municipal bonds to sell into strength where appropriate. We sold about
half the fund's airline-related bonds during the year as prices in the
sector recovered. We may continue to reduce holdings this sector in the
coming months, as our goal is to hold only small positions in what we
believe are the strongest airline companies.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
as of 7/31/03 as of 1/31/04 as of 7/31/04
Average effective
maturity in years 12.0 10.0 9.3
Duration in years 6.9 6.0 5.4
Footnote reads:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective maturity
(a weighted average of the holdings' maturities).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.
How fund holdings affected performance
Airline-related industrial development bonds (IDBs) had a significantly
positive impact on performance, although these issues gave up some of their
strong gains toward the end of the period. IDBs are municipal bonds backed by
the credit of the company benefiting from the financing, not by the issuing
municipality. During the summer of 2003, the airline industry continued to
feel the effects of declining air traffic, high fixed costs, and high-profile
bankruptcies. However, as geopolitical tensions eased and the global economy
began to show signs of increased growth, investors became more optimistic
about prospects for airline-industry fundamentals. This led to a sharp rise
in the price of airline-backed IDBs, as many of these bonds recovered from
distressed price levels.
In the course of the year, we sold all of the fund's IDBs issued for
Delta Airlines, US Air, and United Airlines. We also trimmed positions
in Northwest Airlines and British Airways. Since these bonds had been in
the portfolio for some time, the sales did not result in a profit based
on the acquisition cost, but the fund was able to sell on strength
rather than in distress.
Two bonds issued on behalf of health-care facilities contributed positively
to performance during the year, following their advance refundings. Just as
homeowners refinance mortgages when interest rates decline, a refunded bond
is created when municipalities refinance older bonds they issued when rates
were higher. Unlike a home mortgage, however, the original municipal bond
remains outstanding, with a shorter maturity, as the call date effectively
becomes the new maturity date. The municipality uses the proceeds of the
older bond to buy a portfolio of U.S. Treasury securities, creating an escrow
account that provides the backing for interest and principal payments on the
refunded bonds. Refunded bonds are generally considered equivalent to an
AAA-rated bond in quality. The bonds issued by the New Jersey Economic
Development Authority for Winchester Gardens and by the Massachusetts Health
and Education Facilities Authority for Winchester Hospital will now be called
in 2006 and 2010, respectively.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa (12.8%)
A (8.8%)
Baa (33.8%)
Ba (24.0%)
B (11.8%)
Caa (1.3%)
D (1.5%)
VMIG1 (6.0%)
Footnote reads:
As a percentage of market value as of 7/31/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's
ratings; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality.
Credit upgrades are another positive development for high-yield
bondholders. Two of the fund's hospital holdings experienced improved
operating and financial performance during the year. One is Allegheny
County Hospital Development Authority bonds issued for West Pennsylvania
Allegheny Health System. At the end of the fund's fiscal year, Standard
& Poor's changed its outlook on this health system from "stable" to
"positive," reflecting its improved situation. Another is Lufkin, Texas,
Health Facilities Development Corporation bonds issued for Memorial
Health System of East Texas. Standard & Poor's upgraded these bonds from
BBB- to BBB in June.
On the downside, two long-term care bonds detracted from performance.
The price of Pima County, Arizona, Industrial Development Authority for
Handmaker Jewish Services declined, reflecting the project's weakened
financial position. The bonds were issued originally in 2000 to finance
the repositioning of one of Handmaker's facilities located in Pima,
Arizona. The project directors have not managed the facility's expenses
successfully, which has led to a weak cash position. The second of our
underperforming long-term health-care bonds was issued by the Louisiana
Local Government Environmental Facilities Community Development
Authority for St. James Place of Baton Rouge. St. James Place, a
retirement community that has struggled both operationally and
financially for several years, is currently negotiating with bondholders
for debt relief.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
The fund's management team
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), James St. John
(Portfolio Member), and Kevin Cronin.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
Early in 2004, lingering unemployment had been an anomaly in an otherwise
robust economic recovery. However, in early April, employment data began to
show a marked improvement in job creation. We believe the economy will
continue to grow -- albeit at a slower rate -- and that the underlying
strength in the economy will foster higher interest rates in the future. We
also expect the Fed to raise the federal funds rate several times between now
and June 2005. This should contribute to further flattening in the yield
curve, as we believe short-term interest rates are likely to rise faster than
long-term rates.
In keeping with our views, we are now managing the fund's duration
somewhat defensively. We believe the credit quality of higher-yielding
municipal bonds will improve gradually as the economy improves. Although
yield spreads between high- and low-quality municipal bonds have already
narrowed, we believe they will remain attractive and that prices could
rise farther. As a result, we believe credit risk is worth taking in
appropriate amounts, while we continue to seek diversification by sector
and issuer. As always, we will monitor market conditions as we pursue a
high level of tax-free income and seek to manage the fund's risk
exposure.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Capital gains, if any,
are taxable for federal and, in most cases, state purposes. For some
investors, investment income may be subject to the federal alternative
minimum tax. Income from federally exempt funds may be subject to state and
local taxes. Mutual funds that invest in bonds are subject to certain risks,
including interest-rate risk, credit risk, and inflation risk. As interest
rates rise, the prices of bonds fall. Long-term bonds are more exposed to
interest-rate risk than short-term bonds. Unlike bonds, bond funds have
ongoing fees and expenses. Lower-rated bonds may offer higher yields in
return for more risk. Tax-free funds may not be suitable for IRAs and other
non-taxable accounts.
Performance summary
This section shows your fund's performance during its fiscal year, which
ended July 31, 2004. In accordance with regulatory requirements, we also
include performance for the most current calendar quarter-end.
Performance should always be considered in light of a fund's investment
strategy. Data represents past performance. Past performance does not
guarantee future results. More recent returns may be less or more than
those shown. Investment return and principal value will fluctuate and
you may have a gain or a loss when you sell your shares. For the most
recent month-end performance, please visit www.putnaminvestments.com.
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 7/31/04
- --------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- --------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- --------------------------------------------------------------------------------------------------------------
1 year 6.87% 1.81% 6.16% 1.16% 6.11% 5.11% 6.56% 3.10%
- --------------------------------------------------------------------------------------------------------------
5 years 18.47 12.89 15.24 13.47 13.90 13.90 16.62 12.87
Annual average 3.45 2.45 2.88 2.56 2.64 2.64 3.12 2.45
- --------------------------------------------------------------------------------------------------------------
10 years 58.72 51.20 49.90 49.90 46.43 46.43 53.63 48.66
Annual average 4.73 4.22 4.13 4.13 3.89 3.89 4.39 4.04
- --------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.81 6.53 6.45 6.45 5.95 5.95 6.59 6.41
- --------------------------------------------------------------------------------------------------------------
Performance assumes reinvestment of distributions and does not account for
taxes. Returns at public offering price (POP) for class A and M shares
reflect a sales charge of 4.75% and 3.25%, respectively (which for class A
shares does not reflect a reduction in sales charges that went into effect on
January 28, 2004; if this reduction had been in place for all periods
indicated, returns would have been higher). Class B share returns reflect the
applicable contingent deferred sales charge (CDSC), which is 5% in the first
year, declining to 1% in the sixth year, and is eliminated thereafter. Class
C shares reflect a 1% CDSC the first year that is eliminated thereafter.
Performance for class A, C, and M shares is derived from the historical
performance of class B shares for the periods prior to their inception,
adjusted for the applicable sales charge (or CDSC) and higher or lower
operating expenses for such shares. For a portion of the period, this fund
limited expenses, without which returns would have been lower.
A 2% short-term trading fee will be applied to shares exchanged or sold
within 5 days of purchase.
- -------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/04
- -------------------------------------------------------------
Lipper High Yield
Lehman Municipal Debt
Municipal Funds category
Bond Index average*
- -------------------------------------------------------------
1 year 5.78% 6.38%
- -------------------------------------------------------------
5 years 34.28 21.97
Annual average 6.07 3.99
- -------------------------------------------------------------
10 years 85.64 62.83
Annual average 6.38 4.94
- -------------------------------------------------------------
Annual average
(life of fund) 7.88 6.76
- -------------------------------------------------------------
Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 1-, 5-, and 10-year periods ended 7/31/04, there were 80, 59,
and 27 funds, respectively, in this Lipper category.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment, 7/31/94 to 7/31/04
Fund's class A Lehman Municipal
shares at POP Bond Index
7/31/94 9,550 10,000
7/31/95 10,005 10,787
7/31/96 10,794 11,499
7/31/97 11,672 12,678
7/31/98 12,490 13,438
7/31/99 12,762 13,824
7/31/00 12,807 14,420
7/31/01 13,695 15,874
7/31/02 13,927 16,939
7/31/03 14,124 17,549
7/31/04 $15,120 $18,564
Footnote reads:
Past performance does not indicate future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $14,990 and $14,643, respectively, and
no contingent deferred sales charges would apply. A $10,000 investment
in the fund's class M shares would have been valued at $15,363 ($14,866
at public offering price). See first page of performance section for
performance calculation method.
- -----------------------------------------------------------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/04
- -----------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
Distributions (number) 12 12 12 12
- -----------------------------------------------------------------------------------------------------------------
Income 1 $0.680440 $0.599949 $0.580436 $0.642928
- -----------------------------------------------------------------------------------------------------------------
Capital gains 1 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total $0.680440 $0.599949 $0.580436 $0.642928
- -----------------------------------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- -----------------------------------------------------------------------------------------------------------------
7/31/03 $12.31 $12.92 $12.33 $12.31 $12.31 $12.72
- -----------------------------------------------------------------------------------------------------------------
7/31/04 12.46 13.05* 12.48 12.47 12.46 12.88
- -----------------------------------------------------------------------------------------------------------------
Current return (end of period)
- -----------------------------------------------------------------------------------------------------------------
Current dividend rate 2 5.26% 5.02% 4.61% 4.46% 4.96% 4.80%
- -----------------------------------------------------------------------------------------------------------------
Taxable equivalent 3 8.09 7.72 7.09 6.86 7.63 7.38
- -----------------------------------------------------------------------------------------------------------------
Current 30-day SEC yield
(with expense limitation) 4 4.65 4.44 4.00 3.85 4.35 4.21
- -----------------------------------------------------------------------------------------------------------------
Taxable equivalent 3,4 7.15 6.83 6.15 5.92 6.69 6.48
- -----------------------------------------------------------------------------------------------------------------
Current 30-day SEC yield
(without expense limitation) 4.61 4.40 3.96 3.81 4.31 4.17
- -----------------------------------------------------------------------------------------------------------------
* Reflects a reduction in sales charges that took effect on January 28,
2004.
1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 35.00% federal tax rate for 2004. Results for
investors subject to lower tax rates would be lower.
4 For a portion of the period, this fund limited expenses, without which
yields would have been lower. Based only on investment income,
calculated using SEC guidelines.
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/04 (MOST RECENT CALENDAR QUARTER)
- ---------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- ---------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- ---------------------------------------------------------------------------------------------------------------
1 year 3.37% -1.51% 2.72% -2.17% 2.54% 1.56% 3.06% -0.25%
- ---------------------------------------------------------------------------------------------------------------
5 years 17.43 11.82 14.24 12.49 12.94 12.94 15.67 11.90
Annual average 3.27 2.26 2.70 2.38 2.46 2.46 2.95 2.27
- ---------------------------------------------------------------------------------------------------------------
10 years 59.48 51.93 50.63 50.63 47.14 47.14 54.33 49.36
Annual average 4.78 4.27 4.18 4.18 3.94 3.94 4.43 4.09
- ---------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.78 6.50 6.43 6.43 5.92 5.92 6.56 6.38
- ---------------------------------------------------------------------------------------------------------------
Understanding your fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management fees,
distribution fees (12b-1 fees), and other expenses. Using the information
below, you can estimate how these expenses affect your investment and compare
them with the expenses of other funds. You may also pay one-time transaction
expenses, including sales charges (loads) and redemption fees, which are not
shown in this section and would have resulted in higher total expenses. For
more information, see your fund's prospectus or talk to your financial
advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000 investment
in Putnam Tax-Free High Yield Fund from February 1, 2004, to July 31, 2004.
It also shows how much a $1,000 investment would be worth at the close of the
period, assuming actual returns and expenses.
- -----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 7/31/04
- -----------------------------------------------------------------------------
Class A Class B Class C Class M
- -----------------------------------------------------------------------------
Expenses paid per
$1,000* $4.60 $7.87 $8.63 $6.11
- -----------------------------------------------------------------------------
Ending value (after
expenses) $1,011.40 $1,008.00 $1,007.40 $1,009.90
- -----------------------------------------------------------------------------
* Expenses for each share class are calculated using the fund's annualized
expense ratio for each class, which represents the ongoing expenses as a
percentage of net assets for the six months ended 7/31/04. The expense ratio
may differ for each share class (see the table at the bottom of the next
page). Expenses are calculated by multiplying the expense ratio by the
average account value for the period; then multiplying the result by the
number of days in the period; and then dividing that result by the number of
days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended July 31,
2004, use the calculation method below. To find the value of your investment
on February 1, 2004, go to www.putnaminvestments.com and log on to your
account. Click on the "Transaction History" tab in your Daily Statement and
enter 02/01/2004 in both the "from" and "to" fields. Alternatively, call
Putnam at 1-800-225-1581.
HOW TO CALCULATE THE EXPENSES YOU PAID
- ------------------------------------------------------------------------------
Total
Value of your Expenses paid expenses
investment on 2/1/04 [DIV] $1,000 X per $1,000 = paid
- -----------------------------------------------------------------------------
Example Based on a $10,000 investment in class A shares of your fund.
- -----------------------------------------------------------------------------
$10,000 [DIV] $1,000 X $4.60 (see table above) = $46
- -----------------------------------------------------------------------------
Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines to
help investors assess fund expenses. Per these guidelines, the table below
shows your fund's expenses based on a $1,000 investment, assuming a
hypothetical 5% annualized return. You can use this information to compare
the ongoing expenses (but not transaction expenses or total costs) of
investing in the fund with those of other funds. All mutual fund shareholder
reports will provide this information to help you make this comparison.
Please note that you cannot use this information to estimate your actual
ending account balance and expenses paid during the period.
- -----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 7/31/04
- -----------------------------------------------------------------------------
Class A Class B Class C Class M
- -----------------------------------------------------------------------------
Expenses paid per
$1,000* $4.62 $7.91 $8.67 $6.14
- -----------------------------------------------------------------------------
Ending value (after
expenses) $1,020.56 $1,017.29 $1,016.54 $1,019.05
- -----------------------------------------------------------------------------
* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended 7/31/04.
The expense ratio may differ for each share class (see the table at the
bottom of this page). Expenses are calculated by multiplying the expense
ratio by the average account value for the period; then multiplying the
result by the number of days in the period; and then dividing that
result by the number of days in the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with industry averages, as
determined by Lipper, an independent fund-rating agency that ranks funds
relative to others that Lipper considers to have similar investment styles or
objectives. The expense ratio for each share class shown below indicates how
much of your fund's net assets have been used to pay ongoing expenses during
the period.
- -----------------------------------------------------------------------------
EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
- -----------------------------------------------------------------------------
Class A Class B Class C Class M
- -----------------------------------------------------------------------------
Your fund's annualized
expense ratio + 0.91% 1.56% 1.71% 1.21%
- -----------------------------------------------------------------------------
Average annualized expense
ratio for Lipper peer group ++ 0.91% 1.56% 1.71% 1.21%
- -------------------------------------------------------------------------------
+ For the fund's most recent fiscal half year; may differ from expense ratios
based on one-year data in the financial highlights.
++ For class A shares, expenses shown represent the average of the expenses
of front-end load funds viewed by Lipper as having the same investment
classification or objective as the fund, calculated in accordance with
Lipper's standard reporting methodology for comparing expenses within a
given universe. All Lipper data is for the most recent fiscal periods
available as of 6/30/04. For class B, C, M shares, Putnam has
adjusted the Lipper total expense average to reflect higher 12b-1 fees
incurred by these classes of shares. The peer group may include funds that
are significantly larger or smaller than the fund, which may limit the
comparability of the fund's expenses to the Lipper average.
Understanding your fund's portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries, economies,
and markets. Portfolio turnover is a measure of how often a fund's managers
buy and sell securities for your fund. A portfolio turnover of 100%, for
example, means that the managers sold and replaced securities valued at 100%
of a fund's assets within a one-year period. Funds with high turnover may be
more likely to generate capital gains and dividends that must be distributed
to shareholders as taxable income. High turnover may also cause a fund to pay
more brokerage commissions and other transaction costs, which may detract
from performance.
Funds that invest in bonds may have higher turnover than funds that invest
only in stocks. Short-term bond funds tend to have higher turnover than
longer-term bond funds, because shorter-term bonds will mature or be sold
more frequently than longer-term bonds. You can use the table below to
compare your fund's turnover with the average turnover for funds in its
Lipper category.
- -------------------------------------------------------------------------------
TURNOVER COMPARISONS
percentage of holdings that change every year
- -------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------
Putnam Tax-Free
High Yield Fund 18% 29% 20% 18% 12%
- -------------------------------------------------------------------------------
Lipper High Yield Municipal
Debt Funds category average 32% 34% 36% 30% 34%
- -------------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on July 31. Turnover data for the fund's Lipper category
is calculated based on the average of the turnover of each fund in the
category for its fiscal year ended during the indicated year, with the
exception of 2004 data. Lipper data for 2004 represents the average turnover
for each fund in the category for its most recent fiscal year and for which
data is available as of 6/30/04.
Risk comparison
As part of new initiatives to enhance disclosure, we are including a risk
comparison to help you understand how your fund compares with other funds.
The comparison utilizes a risk measure developed by Morningstar, an
independent fund-rating agency. This risk measure is referred to as the
fund's Overall Morningstar Risk.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 0.13
Municipal bond
fund average 0.22
0% INCREASING RISK 100%
Your fund's Overall Morningstar Risk is shown alongside that of the average
fund in its broad asset class, as determined by Morningstar. The risk bar
broadens the comparison by translating the fund's Overall Morningstar Risk
into a percentile, which is based on the fund's ranking among all funds rated
by Morningstar as of 6/30/04. A higher Overall Morningstar Risk generally
indicates that a fund's monthly returns have varied more widely.
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those measures
are weighted and averaged to produce the fund's Overall Morningstar Risk. The
information shown is provided for the fund's class A shares only; information
for other classes may vary. Overall Morningstar Risk is based on historical
data and does not indicate future results. Morningstar does not purport to
measure the risk associated with a current investment in a fund, either on an
absolute basis or on a relative basis. Low Overall Morningstar Risk does not
mean that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein (1)
is proprietary to Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be accurate, complete, or
timely. Neither Morningstar nor its content providers are responsible for any
damages or losses arising from any use of this information.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares (since reduced to 4.50%) and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Lehman Intermediate Treasury Bond Index is an unmanaged index of
Treasury bonds with maturities between 1 and 10 years.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Russell 2000 Growth Index is an unmanaged index of those companies in
the Russell 2000 Index chosen for their growth orientation.
S&P 500 Index is an unmanaged index of common stock performance.
S&P Utilities Index is an unmanaged index of common stock issued by
utilities companies.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside vendors
who provide services to us, such as mailing and proxy solicitation. In those
cases, the service providers enter into confidentiality agreements with us,
and we provide only the information necessary to process transactions and
perform other services related to your account. We may also share this
information with our Putnam affiliates to service your account or provide you
with information about other Putnam products or services. It is also our
policy to share account information with your financial advisor, if you've
listed one on your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures by calling Putnam's
Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, the fund will file a complete
schedule of its portfolio holdings with the SEC for the first and third
quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund's
Forms N-Q on the SEC's Web site at www.sec.gov. In addition, the fund's Forms
N-Q may be reviewed and copied at the SEC's public reference room in
Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about
the SEC's Web site or the operation of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Report of Independent Registered Public Accounting Firm,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
Statement of changes in net assets shows how the fund's net assets were
affected by the fund's net investment gain or loss, by distributions to
shareholders, and by changes in the number of the fund's shares. It
lists distributions and their sources (net investment income or realized
capital gains) over the current reporting period and the most recent
fiscal year-end. The distributions listed here may not match the sources
listed in the Statement of operations because the distributions are
determined on a tax basis and may be paid in a different period from the
one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
Report of Independent Registered
Public Accounting Firm
To the Trustees and Shareholders of
Putnam Tax-Free High Yield Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam
Tax-Free High Yield Fund (the "fund") at July 31, 2004, and the results
of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at July 31, 2004, by correspondence
with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 13, 2004
The fund's portfolio
July 31, 2004
Key to Abbreviations
- -------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FRB Floating Rate Bonds
FSA Financial Security Assurance
G.O. Bonds General Obligation Bonds
IFB Inverse Floating Rate Bonds
MBIA MBIA Insurance Company
U.S. Govt. Coll. U.S. Government Collateralized
VRDN Variable Rate Demand Notes
Municipal bonds and notes (98.2%) (a)
Principal amount Rating (RAT) Value
Alabama (0.6%)
- -------------------------------------------------------------------------------
$1,420,000 Anniston, Indl. Dev. Rev. Bonds
(Hoover Group, Inc.), 8 1/2s,
9/1/10 D/P $781,000
5,000,000 Jackson Cnty., Hlth. Care Auth.
Rev. Bonds, 5.7s, 5/1/19 BB+ 4,543,750
1,000,000 Phenix City, Indl. Dev. Board
Rev. Bonds (Mead Coated Board),
Ser. A, 5.3s, 4/1/27 Baa2 917,500
--------------
6,242,250
Arizona (2.0%)
- -------------------------------------------------------------------------------
1,500,000 AZ State Hlth. Fac. Auth.
Rev. Bonds (Bethesda Foundation),
Ser. A, 6.4s, 8/15/27 BB-/P 1,438,125
Casa Grande, Indl. Dev. Auth.
Rev. Bonds (Casa Grande Regl. Med.
Ctr.), Ser. A
4,000,000 7 5/8s, 12/1/29 B-/P 4,145,000
500,000 7 1/4s, 12/1/19 B-/P 511,250
Cochise Cnty., Indl. Dev. Auth.
Rev. Bonds (Sierra Vista Regl.
Hlth. Ctr.)
3,425,000 7 3/4s, 12/1/30 BB+/P 3,733,250
1,000,000 Ser. A, 6.2s, 12/1/21 BB+/P 995,000
5,280,000 Pima Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds, Ser. A,
8 1/2s, 11/15/32 B/P 4,653,000
Scottsdale, Indl. Dev. Auth.
Rev. Bonds (Westminster Village 1st.
Mtge.), Ser. A
1,500,000 U.S. Govt. Coll., 8 1/4s, 6/1/15 AAA/P 1,611,375
2,300,000 U.S. Govt. Coll., 8s, 6/1/11 AAA/P 2,466,083
--------------
19,553,083
Arkansas (1.1%)
- -------------------------------------------------------------------------------
6,600,000 AR State Hosp. Dev. Fin. Auth.
Rev. Bonds (Washington Regl. Med.
Ctr.), 7 3/8s, 2/1/29 Baa3 7,243,500
3,650,000 Northwest Regl. Arpt. Auth.
Rev. Bonds, 7 5/8s, 2/1/27 BB/P 3,932,875
--------------
11,176,375
California (8.4%)
- -------------------------------------------------------------------------------
3,000,000 ABAG Fin. Auth. COP (American
Baptist Homes), Ser. A, 5.85s,
10/1/27 BB+ 2,778,750
7,500,000 CA State Dept. of Wtr. Resources
Rev. Bonds, Ser. A, 5 3/8s, 5/1/22 A2 7,818,750
4,300,000 CA Statewide Cmnty. Dev. Auth. Apt.
Dev. Rev. Bonds (Irvine Apt.
Cmntys.), Ser. A-3, 5.1s, 5/15/25 Baa2 4,498,875
1,000,000 CA Statewide Cmnty. Dev. Auth.
Multi-Fam. Rev. Bonds (Hsg. Equity
Res.), Ser. B, 5.2s, 12/1/29 Baa1 1,052,500
1,000,000 CA Statewide Cmnty. Dev. Auth.
Special Tax Rev. Bonds (Citrus
Garden Apt. Project - D1),
5 1/4s, 7/1/22 A 1,013,750
1,500,000 Capistrano, Unified School Dist.
Cmnty. Fac. Special Tax (No 98-2
Ladera), 5.7s, 9/1/20 BB/P 1,520,625
1,750,000 Capistrano, Unified School Dist.
Cmnty. Fac. Special Tax Bonds
(Ladera), Ser. 98-2, 5 3/4s, 9/1/29 BB/P 1,750,000
1,100,000 Chula Vista, Cmnty. Fac. Dist.
Special Tax (No. 07-I Otay Ranch
Village Eleven), 5.8s, 9/1/28 BB-/P 1,108,250
2,855,000 Chula Vista, Cmnty. Fac. Dist.
Special Tax Rev. Bonds (No. 08-1
Otay Ranch Village Six), 6s, 9/1/33 BB-/P 2,819,313
18,000,000 Corona, COP (Vista Hosp. Syst.),
zero %, 7/1/29 (In default) (NON) D/P 360,000
3,000,000 Elk Grove CA Special Tax Rev. Bonds
(Poppy Ridge Cmnty. Facs. - No
03-01), 6s, 9/1/34 BB/P 3,011,250
1,750,000 Folsom, Special Tax Rev. Bonds
(Cmnty. Facs. Dist. No. 10), 5 7/8s,
9/1/28 BB/P 1,756,563
300,000 Foothill/Eastern Corridor Agcy.
Rev. Bonds (CA Toll Roads), 5 3/4s,
1/15/40 Baa3 298,875
7,835,000 Gilroy, Rev. Bonds (Bonfante Gardens
Park), 8s, 11/1/25 D/P 5,533,469
6,000,000 Golden State Tobacco Securitization
Corp. Rev. Bonds, Ser. B, 5 5/8s,
6/1/38 Baa2 6,067,500
1,000,000 Irvine, Impt. Board Act of 1915
Special Assmt. Bonds (Assmt. Dist.
No. 00-18-GRP 3), 5.55s, 9/2/26 BB+/P 987,500
3,500,000 Los Angeles, Regl. Arpt. Impt. Corp.
Lease Rev. Bonds, Ser. C, 7 1/2s,
12/1/24 Caa2 2,983,750
1,520,000 Orange Cnty., Cmnty. Fac. Dist.
Special Tax (No.03-1 Ladera Ranch),
Ser. A, 5.4s, 8/15/22 BB/P 1,518,100
1,625,000 Orange Cnty., Cmnty. Fac. Dist.
Special Tax Rev. Bonds (Ladera Ranch
- No. 02-1), Ser. A, 5.55s, 8/15/33 BB+/P 1,618,906
Redondo Beach, Redev. Agcy.
Multi-Fam. Hsg. Rev. Bonds (Heritage
Point)
2,895,000 Ser. B, 8 1/2s, 9/1/23 B+/P 2,943,983
4,690,000 Ser. A, 6 1/2s, 9/1/23 B+/P 4,770,011
1,500,000 Roseville, Cmnty. Fac. Special Tax
Bonds (Dist. 1), 6s, 9/1/33 BB/P 1,524,375
700,000 Sacramento, Special Tax Rev. Bonds
(North Natomas Cmnty. Fac.), Ser.
4-A, 6s, 9/1/28 BB/P 712,250
1,500,000 San Joaquin Hills, Trans. Corridor
Agcy. Rev. Bonds, Ser. A, 5 1/2s,
1/15/28 Ba2 1,365,000
4,970,000 Santaluz Cmnty., Facs. Dist. No. 2
Special Tax Rev. Bonds (Impt. Area
No. 1), Ser. B, 6 3/8s, 9/1/30 BB+/P 5,075,613
350,000 Southern CA Pub. Pwr. Auth. IFB
(Transmission), 9.84s, 7/1/12 Aa3 352,247
4,560,000 Sunnyvale, Special Tax Rev. Bonds
(Cmnty. Fac. Dist. No. 1), 7 3/4s,
8/1/32 BB-/P 4,588,500
10,500,000 Vallejo, COP (Marine World
Foundation), 7.2s, 2/1/26 BBB-/P 10,526,250
3,825,000 Valley Hlth. Syst. COP, 6 7/8s,
5/15/23 B+ 3,203,438
--------------
83,558,393
Colorado (0.7%)
- -------------------------------------------------------------------------------
5,000,000 CO Hlth. Fac. Auth.
Rev. Bonds (Evangelical Lutheran),
5.9s, 10/1/27 A3 5,062,500
CO Springs, Hosp. Rev. Bonds
755,000 6 3/8s, 12/15/30 A3 805,019
745,000 6 3/8s, 12/15/30 (Prerefunded) A3 879,100
--------------
6,746,619
Connecticut (3.2%)
- -------------------------------------------------------------------------------
CT State Dev. Auth. Rev. Bonds (East
Hills Woods)
4,183,644 Ser. A, 7 3/4s, 11/1/17 B-/P 3,294,620
457,428 Ser. B, zero %, 3/1/21 B-/P 24,015
2,000,000 CT State Dev. Auth. 1st. Mtg. Gross
Rev. Hlth. Care Rev. Bonds (The Elm
Street Park Baptist, Inc. Project),
5.85s, 12/1/33 BBB+ 2,027,500
6,000,000 CT State Dev. Auth. Poll. Control
Rev. Bonds (Western MA), Ser. A,
5.85s, 9/1/28 A3 6,262,500
CT State Hlth. & Edl. Fac. Auth.
VRDN, (Yale U.)
10,000,000 Ser. U, 0.96s, 7/1/33 VMIG1 10,000,000
10,000,000 Ser. U2, 0.96s, 7/1/33 VMIG1 10,000,000
--------------
31,608,635
District of Columbia (2.4%)
- -------------------------------------------------------------------------------
17,000,000 DC G.O. Bonds, Ser. A, 6 3/8s,
6/1/26 AAA 18,700,000
5,500,000 DC Tobacco Settlement Fin. Corp.
Rev. Bonds, 6 1/2s, 5/15/33 BBB 4,805,625
--------------
23,505,625
Florida (5.1%)
- -------------------------------------------------------------------------------
9,260,000 Brevard Cnty., Hlth. Fac. Auth.
Rev. Bonds (Courtenay Springs),
7 3/4s, 11/15/24 AAA/P 9,613,639
3,105,000 Cap. Trust Agcy. Multi-Fam.
Rev. Bonds
(American Opportunity-Senior),
Ser. A, 5 7/8s, 12/1/38 Baa1 2,891,531
5,000,000 Cap. Trust Agcy. Rev. Bonds
(Seminole Tribe Convention), Ser. A,
10s, 10/1/33 B/P 6,050,000
3,000,000 CFM Cmnty. Dev. Dist. Rev. Bonds,
Ser. A, 6 1/4s, 5/1/35 BB-/P 3,022,500
Fishhawk, Cmnty. Dev. Dist. II
Rev. Bonds, Ser. B
2,500,000 5 1/8s, 11/1/09 BB-/P 2,506,250
1,780,000 5s, 11/1/07 BB-/P 1,784,450
5,180,000 FL State Fin. Dept. Gen. Svcs. IFB
(Rites-PA 414A), FSA, 9.119s, 7/1/11
(acquired 9/2/98, cost $6,687,794)
(RES) AAA/P 6,798,750
1,000,000 Halifax, Hosp. Med. Ctr. Rev. Bonds,
Ser. A, 7 1/4s, 10/1/29 BBB- 1,072,500
3,300,000 Lee Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds (Shell Point
Village Project), Ser. A, 5 1/2s,
11/15/29 BBB- 3,093,750
2,000,000 Middle Village Cmnty. Dev. Dist.
Special Assmt., Ser. A, 6s, 5/1/35 BB-/P 2,010,000
Orange Cnty., Hlth. Fac. Auth.
Rev. Bonds
1,400,000 (Orlando Regl. Hlth. Care), 5 3/4s,
12/1/32 A2 1,424,500
3,750,000 (Adventist Hlth. Syst.), 5 5/8s,
11/15/32 A 3,801,563
1,800,000 St. Johns Cnty., Hlth. Care Indl.
Dev. Auth. Rev. Bonds (Glenmoor St.
Johns Project), Ser. A, 8s, 1/1/30 B-/P 1,719,000
990,000 Verandah, West Cmnty. Dev. Dist.
Rev. Bonds (Cap. Impt.), Ser. A,
6 5/8s, 5/1/33 BB-/P 1,011,038
2,250,000 Westchester Cmnty. Dev. Dist. No. 1
Special Assmt. (Cmnty.
Infrastructure), 6 1/8s, 5/1/35 BB-/P 2,266,875
World Commerce Cmnty. Dev. Dist.
Special Assmt., Ser. A-1
1,250,000 6 1/2s, 5/1/36 BB-/P 1,250,000
1,000,000 6 1/4s, 5/1/22 BB-/P 988,750
--------------
51,305,096
Georgia (3.9%)
- -------------------------------------------------------------------------------
6,165,000 Atlanta, Waste Wtr. VRDN, Ser. C,
FSA, 1.10s, 11/1/41 VMIG1 6,165,000
8,000,000 Burke Cnty., Poll. Control Dev.
Auth. Mandatory Put Bonds (GA Power
Co.), 4.45s, 12/1/08 A2 8,340,000
3,400,000 Effingham Cnty., Indl. Dev. Auth.
Rev. Bonds (Pacific Corp.), 6 1/2s,
6/1/31 Ba3 3,455,250
6,000,000 Forsyth Cnty., Hosp. Auth.
Rev. Bonds (GA Baptist Hlth. Care
Syst.), U.S. Govt. Coll.,
6 3/8s, 10/1/28 AAA 7,230,000
4,370,000 Forsyth Cnty., Indl. Dev. Auth.
Rev. Bonds (Hoover Group, Inc.),
8 1/2s, 12/1/05 D/P 2,403,500
800,000 Fulton Cnty., Res. Care Fac.
Rev. Bonds (Canterbury Court), Class
A, 6 1/8s, 2/15/34 B+/P 792,000
6,875,000 Rockdale Cnty., Dev. Auth. Solid
Waste Disp. Rev. Bonds (Visay Paper,
Inc.), 7 1/2s, 1/1/26 BB+/P 7,101,188
3,160,000 Savannah, Econ. Dev. Auth. Poll.
Control Rev. Bonds (Stone Container
Corp.), 8 1/8s, 7/1/15 B/P 3,269,146
--------------
38,756,084
Illinois (1.5%)
- -------------------------------------------------------------------------------
1,500,000 Chicago, Special Assmt. Bonds (Lake
Shore East), 6 3/4s, 12/1/32 B+/P 1,541,250
1,025,000 IL Dev. Fin. Auth. Rev. Bonds (Mercy
Hsg. Corp.), 7s, 8/1/24 Baa1 1,045,500
IL Hlth. Fac. Auth. Rev. Bonds
740,000 (Cmnty. Rehab. Providers Fac.),
8 1/4s, 8/1/12 D/P 666,000
4,105,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 (Prerefunded) AAA/P 4,420,346
610,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 D/P 488,000
1,000,000 (St. Benedict), Ser. 03A-1, 6.9s,
11/15/33 B+/P 992,500
6,000,000 (Elmhurst Memorial Hlth. Care),
5 5/8s, 1/1/28 A2 6,090,000
--------------
15,243,596
Indiana (1.4%)
- -------------------------------------------------------------------------------
6,500,000 Indianapolis, Arpt. Auth. Rev. Bonds
(Federal Express Corp.), 5.1s,
1/15/17 Baa2 6,581,250
900,000 Plainfield, Indl. Econ. Dev.
Rev. Bonds (Earl M. Jorgensen Co.),
8 1/2s, 9/1/04 B-/P 900,999
2,200,000 Rockport, Poll. Control Mandatory
Put Bonds (Indiana Michigan Pwr.
Co.), Ser. C, 2 5/8s, 10/1/06 BBB 2,180,750
4,000,000 Rockport, Poll. Control
Rev. Bonds (Indiana-Michigan Pwr.),
Ser. A, 4.9s, 6/1/25 Baa2 4,155,000
--------------
13,817,999
Iowa (1.7%)
- -------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac.
Rev. Bonds (Care Initiatives)
13,860,000 9 1/4s, 7/1/25 BBB-/P 16,250,850
775,000 9.15s, 7/1/09 BBB-/P 884,469
105,000 Marion Hlth. Care Fac. Rev. Bonds
(First Mtg.), Ser. IA, 1.76s, 1/1/29 CCC 95,288
--------------
17,230,607
Kansas (0.4%)
- -------------------------------------------------------------------------------
Lenexa, Hlth. Care Rev. Bonds
(LakeView Village)
2,250,000 Ser. C, 6 7/8s, 5/15/32 BB+ 2,328,750
1,200,000 Ser. B, 6 1/4s, 5/15/26 BB+ 1,201,500
--------------
3,530,250
Kentucky (0.8%)
- -------------------------------------------------------------------------------
610,000 Kentucky Econ. Dev. Fin. Auth.
Rev. Bonds (First Mtg.), Ser. IA,
6 1/2s, 1/1/29 CCC 553,575
KY Econ. Dev. Fin. Auth. Hlth. Syst.
Rev. Bonds (Norton Healthcare,
Inc.), Ser. A
3,250,000 6 5/8s, 10/1/28 BBB+ 3,384,063
3,740,000 6 1/8s, 10/1/10 BBB+ 3,973,750
--------------
7,911,388
Louisiana (2.8%)
- -------------------------------------------------------------------------------
3,000,000 LA Hlth. Ed. Auth. Rev. Bonds
(Lambert House), Ser. A, 6.2s,
1/1/28 B+/P 2,928,750
5,335,000 LA Local Govt. Env. Fac. Cmnty. Dev.
Auth. Rev. Bonds (St. James Place),
Ser. A, 8s, 11/1/19 B-/P 3,481,088
4,420,000 LA Pub. Fac. Auth. Hosp. Rev. Bonds
(Lake Charles Memorial Hosp.),
8 5/8s, 12/1/30 CCC/P 3,315,000
6,000,000 Port of New Orleans, Indl. Dev.
Rev. Bonds (Continental Grain Co.),
7 1/2s, 7/1/13 BB- 6,134,040
3,000,000 St. Charles Parish, Poll. Control
Rev. Bonds, Ser. A, 4.9s, 6/1/30 Baa3 3,055,590
9,000,000 W. Feliciana Parish, Solid Waste
Disp. Rev. Bonds (Kaiser Aluminum),
7.7s, 12/1/14 Ba1 9,146,610
--------------
28,061,078
Maine (0.4%)
- -------------------------------------------------------------------------------
3,500,000 Rumford, Solid Waste Disp.
Rev. Bonds (Boise Cascade Corp.),
6 7/8s, 10/1/26 Ba2 3,574,375
Maryland (1.3%)
- -------------------------------------------------------------------------------
5,000,000 Howard Cnty., Rev. Bonds, Ser. A,
U.S. Govt. Coll., 8s, 5/15/29 AAA 6,318,750
MD State Hlth. & Higher Edl. Fac.
Auth. Rev. Bonds
2,000,000 (Mercy Ridge), Ser. A, 6s, 4/1/35 BB+/P 2,000,000
1,500,000 (Medstar Health), 5 1/2s, 8/15/33 Baa2 1,462,500
3,400,000 Westminster, Econ. Dev Rev. Bonds
(Carroll Lutheran Village), Ser. A,
6 1/4s, 5/1/34 BB/P 3,417,000
--------------
13,198,250
Massachusetts (4.4%)
- -------------------------------------------------------------------------------
1,890,000 MA State Dev. Fin. Agcy.
Rev. Bonds (Lasell College), 6 3/4s,
7/1/31 1,875,825
5,600,000 MA State Hlth. & Edl. Fac. Auth. IFB
(Boston U.), Ser. L, AMBAC, 10.296s,
7/1/25 5,632,704
MA State Hlth. & Edl. Fac. Auth.
Rev. Bonds
5,750,000 (Civic Investments), Ser. A, 9s,
12/15/15 6,533,438
4,000,000 (Jordan Hosp.), Ser. E, 6 3/4s,
10/1/33 4,015,000
4,900,000 (Winchester Hosp.), Ser. E, 6 3/4s,
7/1/30 5,763,625
5,850,000 (UMass Memorial), Ser. C, 6 5/8s,
7/1/32 6,040,125
2,200,000 (Berkshire Hlth. Syst.), Ser. E,
6 1/4s, 10/1/31 2,238,500
4,500,000 (Hlth. Care Syst. Covenant Hlth.),
Ser. E, 6s, 7/1/31 4,612,500
2,630,000 (Caritas Christi Oblig. Group),
Ser. A, 5 1/4s, 7/1/08 2,771,363
1,855,000 MA State Indl. Fin. Agcy. R (TNG
Marina Bay LLC Project), 7 1/2s,
12/1/27 1,871,231
MA State Indl. Fin. Agcy. Rev. Bonds
2,378,153 (Evanswood Bethzatha Corp.), 8s,
1/15/27 (In default) (NON) 2,973
750,000 (1st Mtge. Stone Institution &
Newton), 7.9s, 1/1/24 767,820
1,664,711 (1st. Mtge. Evanswood Bethzatha-A),
7 7/8s, 1/15/20 (In default) (NON) 2,081
1,765,000 (Sr. Living Fac. Forge Hill), 7s,
4/1/17 1,745,144
--------------
43,872,329
Michigan (6.6%)
- -------------------------------------------------------------------------------
2,251,000 Ann Arbor, Econ. Dev. Corp. Ltd.
Oblig. Rev. Bonds (Glacier Hills,
Inc.), State & Local Govt.
Coll., 8 3/8s, 1/15/19 AAA 2,934,741
2,000,000 Delta Cnty., Econ. Dev. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 4/15/27 Baa2 2,072,500
7,600,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 1.10s, 7/1/33 VMIG1 7,600,000
10,000,000 Dickinson Cnty., Econ. Dev. Corp.
Rev. Bonds, 5 3/4s, 6/1/16 Baa2 10,575,000
1,500,000 Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr.), 6s, 7/1/20 Baa3 1,477,500
Garden City, Hosp. Fin. Auth.
Rev. Bonds (Garden City Hosp. OB
Group), Ser. A
3,000,000 5 3/4s, 9/1/17 Ba2 2,797,500
2,000,000 5 5/8s, 9/1/10 Ba2 1,937,500
4,600,000 Macomb Cnty., Hosp. Fin. Auth.
Rev. Bonds (Mt. Clemens Gen.
Hosp.), Ser. B, 5 7/8s, 11/15/34 BBB- 4,209,000
15,000,000 MI State Strategic Fund Ltd. Oblig.
Rev. Bonds (Detroit Edison Co.),
MBIA, 6.4s, 9/1/25 Aaa 16,006,950
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
2,650,000 (Genesee Pwr. Station), 7 1/2s,
1/1/21 B/P 2,298,875
3,500,000 (SD Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 3,622,500
5,000,000 Midland Cnty., Econ. Dev. Corp.
Rev. Bonds, 6 3/4s, 7/23/09 Ba3 5,187,500
5,495,000 Waterford, Econ. Dev. Corp.
Rev. Bonds (Canterbury Hlth.), 6s,
1/1/39 B-/P 4,025,088
2,000,000 Wayne Charter Cnty., Special Arpt.
Fac. Rev. Bonds (Northwest Airlines,
Inc.), 6s, 12/1/29 B+/P 1,435,000
--------------
66,179,654
Minnesota (0.5%)
- -------------------------------------------------------------------------------
2,600,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical, Inc. Project),
10 1/4s, 9/1/20 BB/P 2,661,932
2,075,000 Minneapolis, Rev. Bonds (Walker
Methodist Sr. Svcs.), Ser. A, 6s,
11/15/28 B+/P 1,579,594
800,000 Sauk Rapids Hlth. Care & Hsg. Fac.
Rev. Bonds (Good Shepherd Lutheran
Home), 6s, 1/1/34 B/P 790,000
--------------
5,031,526
Mississippi (0.2%)
- -------------------------------------------------------------------------------
1,500,000 Jackson Cnty., VRDN, 1.10s, 12/1/16 VMIG1 1,500,000
Missouri (3.4%)
- -------------------------------------------------------------------------------
3,250,000 Cape Girardeau Cnty., Indl. Dev.
Auth. Hlth. Care Fac. Rev. Bonds
(St. Francis Med. Ctr.),
Ser. A, 5 1/2s, 6/1/27 A 3,270,313
2,000,000 Kansas City, Indl. Dev. Auth. Hlth.
Fac. Rev. Bonds (First Mtg. Bishop
Spencer), Ser. A, 6 1/4s, 1/1/24 BB-/P 1,972,500
18,810,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (Cox Hlth. Syst.), AMBAC,
1.15s, 6/1/22 VMIG1 18,810,000
St. Louis Arpt. Rev. Bonds (Lambert
St. Louis Intl.), Ser. A
4,150,000 FSA, 5 1/4s, 7/1/11 Aaa 4,575,375
4,495,000 FSA, 5 1/4s, 7/1/10 Aaa 4,938,881
--------------
33,567,069
Montana (0.1%)
- -------------------------------------------------------------------------------
750,000 MT State Board Inv. Exempt Fac.
Rev. Bonds (Still Water Mining
Project), 8s, 7/1/20 B1 777,188
Nebraska (--%)
- -------------------------------------------------------------------------------
Kearney, Indl. Dev. Rev. Bonds
142,042 (Great Platte River), 8s, 9/1/12 D/P 121,091
1,582,934 (Brookhaven), zero %, 9/1/12 D/P 7,915
--------------
129,006
Nevada (2.0%)
- -------------------------------------------------------------------------------
5,350,000 Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp. Project),
Ser. C, 5.45s, 3/1/38 Baa2 5,691,063
1,500,000 Clark Cnty., Local Impt. Dist.
Special Assmt. Bonds (No. 142),
6.1s, 8/1/18 BB-/P 1,501,875
Henderson, Local Impt. Dist. Special
Assmt. Bonds (No. T-14)
3,735,000 5.8s, 3/1/23 BB-/P 3,777,019
2,640,000 5.55s, 3/1/17 BB-/P 2,669,700
1,500,000 Las Vegas, Local Impt. Board Special
Assmt. (Dist. No. 607), 5.9s, 6/1/17 BB-/P 1,524,375
810,000 Las Vegas, Special Impt. Dist.
Rev. Bonds (No. 809 -- Summerlin
Area), 5.65s, 6/1/23 BB/P 790,763
3,500,000 Washoe Cnty., Wtr. Fac. Mandatory
Put Bonds (Sierra Pacific Pwr. Co.),
5s, 7/1/09 Ba2 3,491,250
--------------
19,446,045
New Hampshire (2.0%)
- -------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth.
Rev. Bonds
5,900,000 (Havenwood-Heritage Heights), 7.35s,
1/1/18 BB-/P 6,099,125
1,000,000 (Riverwoods at Exeter), Ser. A,
6 1/2s, 3/1/23 BB/P 995,000
3,000,000 (Rivermead at Peterborough), 5 3/4s,
7/1/28 BB/P 2,733,750
2,200,000 NH Hlth. & Ed. Fac. Auth. Rev. Bonds
(Huntington at Nashua), Ser. A,
6 7/8s, 5/1/33 B/P 2,202,750
NH State Bus. Fin. Auth. Rev. Bonds
2,500,000 (Alice Peck Day Hlth. Syst.),
Ser. A, 7s, 10/1/29 BBB-/P 2,478,125
2,505,000 (Franklin Regl. Hosp. Assn.),
Ser. A, 6.05s, 9/1/29 BB-/P 2,307,731
3,550,000 (Proctor Academy), Ser. A, 5.6s,
6/1/28 Baa2 3,589,938
8,551,027 NH State Bus. Fin. Auth. Poll.
Control & Solid Waste Rev. Bonds
(Crown Paper Co.), 7 3/4s, 1/1/22
(In default) (NON) D 10,689
--------------
20,417,108
New Jersey (4.5%)
- -------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth.
Rev. Bonds, (Dockside Refrigerated)
8.4s, 4/1/24 (In default) (NON) D/P 4,150,000
NJ Econ. Dev. Auth. Rev. Bonds
7,000,000 (Winchester Gardens), Ser. A,
8 5/8s, 11/1/25 BB-/P 8,128,750
2,100,000 (Cranes Mill), Ser. A, 7 1/2s,
2/1/27 BB-/P 2,189,250
900,000 (Cedar Crest Village, Inc.), Ser. A,
7s, 11/15/16 BB-/P 913,500
7,000,000 (Newark Arpt. Marriot Hotel), 7s,
10/1/14 Ba3 7,175,000
500,000 (First Mtge. Presbyterian Home),
Ser. A, 6 3/8s, 11/1/31 BB/P 503,125
3,000,000 (United Methodist Homes), Ser. A-1,
6 1/4s, 7/1/33 BB+ 2,943,750
500,000 (First Mtge. Presbyterian Home),
Ser. A, 6 1/4s, 11/1/20 BB/P 503,125
5,125,000 NJ Econ. Dev. Auth. Assisted Living
Rev. Bonds (Meridian Assisted
Living), 6 3/4s, 8/1/30 B/P 4,606,094
NJ Hlth. Care Fac. Fin. Auth.
Rev. Bonds
2,000,000 (Columbus Regl. Hosp.), Ser. A,
7 1/2s, 7/1/21 B2 1,812,500
5,000,000 (South Jersey Hosp.), 6s, 7/1/12 Baa1 5,525,000
Tobacco Settlement Fin. Corp.
Rev. Bonds
2,000,000 6 3/4s, 6/1/39 BBB 1,797,500
6,260,000 (Asset Backed Bonds), 6s, 6/1/37 BBB 5,047,125
--------------
45,294,719
New Mexico (0.8%)
- -------------------------------------------------------------------------------
5,500,000 Farmington, Poll. Control Rev. Bonds
(Tucson Elec. Pwr. Co. San Juan),
Ser. A, 6.95s, 10/1/20 Ba3 5,747,500
2,150,000 Farmington, Poll. Control VRDN (AZ
Pub. Svc. Co.), Ser. A, 1.15s,
5/1/24 VMIG1 2,150,000
--------------
7,897,500
New York (7.7%)
- -------------------------------------------------------------------------------
2,250,000 Colonie, Indl. Dev. Agcy. Rev. Bonds
(Cap. Compost & Waste), Ser. A,
3 3/8s, 6/1/21 (In default) (NON) D/P 258,750
1,250,000 Huntington, Hsg. Auth. Rev. Bonds
(Gurwin Jewish Sr. Residence),
Ser. A, 6s, 5/1/39 B+/P 1,129,688
1,575,000 Nassau Cnty., Indl. Dev. Agcy.
Rev. Bonds (North Shore Hlth. Syst.
Project D), 5 1/4s, 11/1/07 A3 1,673,438
NY City, G.O. Bonds
12,560,000 Ser. B, FGIC, 6s, 8/1/06 Aaa 13,469,344
8,000,000 Ser. C, 5 1/2s, 8/1/13 A2 8,770,000
NY City, Indl. Dev. Agcy. Rev. Bonds
4,000,000 (Paper Inc.), 7.8s, 1/1/16 B+/P 4,180,000
2,075,000 (British Airways), 7 5/8s, 12/1/32 BB+ 2,025,719
3,250,000 (Brooklyn Navy Yard Cogen.
Partners), 5.65s, 10/1/28 BBB- 2,937,188
500,000 NY City, Indl. Dev. Agcy. Civic Fac.
Rev. Bonds (Brooklyn Polytech. U.
Project J), 6 1/8s, 11/1/30 BB+ 448,125
5,400,000 NY City, Indl. Dev. Agcy. Special
Arpt. Fac. Rev. Bonds (Airis JFK I
LLC), Ser. A, 5 1/2s, 7/1/28 Baa3 5,204,250
3,325,000 NY City, Indl. Dev. Agcy. Special
Fac. Rev. Bonds (British Airways),
5 1/4s, 12/1/32 BB+ 2,352,438
1,785,000 NY State Dorm. Auth. Rev. Bonds
(Lenox Hill Hosp.), 5 3/4s, 7/1/12 A3 1,963,500
11,185,000 NY State Env. Fac. Corp. Poll.
Control IFB (PA 198), MBIA, 10.393s,
6/15/10 (acquired 10/22/97, cost
$13,449,963) (RES) AAA 14,498,556
5,000,000 Onondaga Cnty., Indl. Dev. Agcy.
Rev. Bonds (Solvay Paperboard, LLC),
7s, 11/1/30 (acquired 12/9/98, cost
$5,000,000) (RES) BB-/P 5,218,750
2,500,000 Port Auth. NY & NJ Rev. Bonds
(Kennedy Intl. Arpt.- 4th
Installment), 6 3/4s, 10/1/11 BB+/P 2,628,125
5,000,000 Suffolk Cnty., Indl. Dev. Agcy.
Rev. Bonds (Peconic Landings),
Ser. A, 8s, 10/1/20 B+/P 5,112,500
Suffolk Cnty., Indl. Dev. Agcy.
Civic Fac. Rev. Bonds
3,800,000 (Southampton Hosp. Assn.), Ser. B,
7 5/8s, 1/1/30 B-/P 3,804,750
1,000,000 (Gurwin Jewish-Phase II), 6.7s,
5/1/39 B+/P 1,007,500
--------------
76,682,621
North Carolina (2.4%)
- -------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst.
Rev. Bonds, Ser. C
7,500,000 5 3/8s, 1/1/17 BBB 7,828,125
1,000,000 5 3/8s, 1/1/16 BBB 1,046,250
2,000,000 5.3s, 1/1/15 BBB 2,095,000
4,500,000 NC Med. Care Comm. Retirement Fac.
Rev. Bonds (1st Mtge. -Givens
Estates Project), Ser. A,
6 1/2s, 7/1/32 BB-/P 4,556,250
NC State Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.)
4,000,000 Ser. B, 6 1/2s, 1/1/20 Baa1 4,420,000
4,000,000 Ser. A, 5 1/2s, 1/1/13 Baa1 4,325,000
--------------
24,270,625
Ohio (2.4%)
- -------------------------------------------------------------------------------
Marion Cnty., Hlth. Care Fac.
Rev. Bonds (United Church Homes)
900,000 6 3/8s, 11/15/10 BBB- 913,500
750,000 6.3s, 11/15/15 BBB- 757,500
1,000,000 OH State Env. Impt. Rev. Bonds (USX
Corp.), 5 5/8s, 5/1/29 Baa1 1,002,500
OH State Higher Edl. Fac. FRB
(Kenyon College Project)
2,500,000 4.95s, 7/1/37 A2 2,565,625
5,000,000 4.85s, 7/1/37 A2 5,150,000
6,500,000 OH State Solid Waste Mandatory Put
Bonds, 4.85s, 11/1/07 BBB 6,743,750
6,000,000 OH State Wtr. Dev. Auth. Poll.
Control Fac. Rev. Bonds, 6.1s,
8/1/20 Baa2 6,067,500
700,000 OH State Wtr. Dev. Auth. Solid Waste
Disp. Rev. Bonds (Bay Shore Power
Co.), Ser. A, 5 7/8s, 9/1/20 BB+/P 652,750
--------------
23,853,125
Oklahoma (0.5%)
- -------------------------------------------------------------------------------
OK Dev. Fin. Auth. Rev. Bonds
385,000 (Continuing Care Retirement),
Ser. A, 8s, 2/1/32 B-/P 355,644
3,075,000 (Hillcrest Hlth. Care), Ser. A,
5 5/8s, 8/15/29 B1 3,113,438
2,350,000 Ottawa Cnty., Fin. Auth. Indl.
Rev. Bonds (Doane Products Co.),
7 1/4s, 6/1/17 B-/P 1,941,688
--------------
5,410,770
Oregon (0.5%)
- -------------------------------------------------------------------------------
5,450,000 Multnomah Cnty., Hosp. Fac. Auth.
Rev. Bonds (Terwilliger Plaza
Project), 6 1/2s, 12/1/29 BB-/P 5,436,375
Pennsylvania (5.8%)
- -------------------------------------------------------------------------------
6,500,000 Allegheny Cnty., Hosp. Dev. Auth.
Rev. Bonds (Hlth. Syst.), Ser. B,
9 1/4s, 11/15/15 B2 7,353,125
1,150,000 Allentown, Hosp. Auth. Rev. Bonds
(Sacred Heart Hosp.), Ser. A,
6 3/4s, 11/15/14 Baa3 1,152,875
7,925,000 Carbon Cnty., Indl. Dev. Auth.
Rev. Bonds (Panther Creek Partners),
6.65s, 5/1/10 BBB- 8,549,094
1,700,000 Chester Cnty., Hlth. & Ed. Fac.
Auth. Rev. Bonds (Jenners Pond,
Inc.), 7 5/8s, 7/1/34 BB-/P 1,719,125
3,750,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s, 1/15/25 CCC/P 1,743,750
1,500,000 Lancaster Cnty., Hosp. Auth.
Rev. Bonds (Gen. Hosp.), 5 1/2s,
3/15/26 A- 1,498,125
Lehigh Cnty., Gen. Purpose Auth.
Rev. Bonds
2,250,000 (St. Luke's Hosp. - Bethlehem),
5 3/8s, 8/15/33 Baa2 2,089,688
2,860,000 (Lehigh Valley Hosp. Hlth. Network),
Ser. A, 5 1/4s, 7/1/32 A2 2,763,475
1,750,000 New Morgan, Indl. Dev. Auth. Solid
Waste Disp. Rev. Bonds (New Morgan
Landfill Co., Inc.), 6 1/2s, 4/1/19 BB- 1,719,375
2,000,000 PA Econ. Dev. Fin. Auth.
Rev. Bonds (Amtrak Project), Ser. A,
6 3/8s, 11/1/41 A3 2,050,000
9,000,000 PA State Econ. Dev. Fin. Auth.
Resource Recvy. Rev. Bonds (Colver
Proj.), Ser. E, 8.05s, 12/1/15 BBB- 9,286,020
PA State Higher Edl. Fac. Auth.
Rev. Bonds
1,500,000 (Widener U.), 5.4s, 7/15/36 BBB+ 1,496,250
1,345,000 (Philadelphia College of Osteopathic
Med.), 5s, 12/1/13 A 1,422,338
Philadelphia, Hosp. & Higher Ed.
Fac. Auth. Rev. Bonds
4,858,731 (Graduate Hlth. Syst. Oblig. Group),
7 1/4s, 7/1/18 (In default) (NON) D/P 6,073
3,000,000 (Jeanses Hosp. Project), 5 7/8s,
7/1/17 Baa2 3,000,000
Scranton, G.O. Bonds, Ser. C
3,060,000 7.1s, 9/1/31 AAA/P 3,756,150
1,000,000 7s, 9/1/22 AAA/P 1,221,250
2,500,000 West Cornwall, Tpk. Muni. Auth.
Rev. Bonds (Elizabethtown College),
6s, 12/15/27 BBB+ 2,559,375
2,600,000 West Shore, Area Hosp. Auth.
Rev. Bonds (Holy Spirit Hosp.),
6 1/4s, 1/1/32 BBB+ 2,639,000
2,000,000 York Cnty., Indl. Dev. Auth.
Rev. Bonds, (PSEG Power, LLC.)
Ser. A, 5 1/2s, 9/1/20 Baa1 2,020,000
--------------
58,045,088
Puerto Rico (0.8%)
- -------------------------------------------------------------------------------
7,400,000 PR Indl. Tourist Edl. Med. & Env.
Control Fac. Rev. Bonds (Cogen.
Fac.-AES), 6 5/8s, 6/1/26 Baa3 7,686,750
Rhode Island (0.1%)
- -------------------------------------------------------------------------------
710,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 6/1/42 BBB 584,863
South Carolina (2.7%)
- -------------------------------------------------------------------------------
1,645,000 Connector 2000 Assn., Inc. SC Toll
Road Rev. Bonds (SR-Southern
Connector), Ser. A, 5 3/8s, 1/1/38 B- 1,071,306
2,120,000 Florence Cnty., Indl. Dev. Auth.
Rev. Bonds (Stone Container Corp.),
7 3/8s, 2/1/07 Ba3 2,155,510
2,275,000 Lexington Cnty. Rev. Bonds, 5 1/2s,
11/1/32 A2 2,289,219
4,000,000 SC Hosp. Auth. Rev. Bonds (Med. U.),
Ser. A, 6 1/2s, 8/15/32 BBB+ 4,170,000
SC Jobs Econ. Dev. Auth. Hosp. Fac.
Rev. Bonds (Palmetto Hlth. Alliance)
3,800,000 Ser. A, 7 3/8s, 12/15/21 Baa2 4,645,500
5,000,000 Ser. C, 6s, 8/1/20 Baa2 5,125,000
9,000,000 SC Tobacco Settlement Rev. Mgt.
Rev. Bonds, Ser. B, 6 3/8s, 5/15/30 BBB 7,683,750
--------------
27,140,285
South Dakota (0.1%)
- -------------------------------------------------------------------------------
1,650,000 SD Edl. Enhancement Funding Corp.
Rev. Bonds, Ser. B, 6 1/2s, 6/1/32 BBB 1,433,438
Tennessee (1.5%)
- -------------------------------------------------------------------------------
1,000,000 Elizabethton, Hlth. & Edl. Fac.
Board Rev. Bonds (Hosp. Ref. &
Impt.), Ser. B, 8s, 7/1/33 Baa2 1,177,500
6,500,000 Johnson City, Hlth. & Edl. Fac.
Board Hosp. Rev. Bonds (Mountain
States Hlth.), Ser. A,
7 1/2s, 7/1/33 BBB+ 7,531,875
Memphis-Shelby Cnty., Arpt. Auth.
Rev. Bonds (Federal Express Corp.)
4,000,000 5.05s, 9/1/12 Baa2 4,215,000
2,000,000 4 1/2s, 7/1/14 Baa2 1,967,500
--------------
14,891,875
Texas (4.5%)
- -------------------------------------------------------------------------------
6,850,000 Abilene, Hlth. Fac. Dev. Corp.
Rev. Bonds (Sears Methodist
Retirement), Ser. A, 5.9s, 11/15/25 BB/P 6,293,438
3,985,000 Crawford Ed. Fac. Rev. Bonds (U. St.
Thomas), 5 3/8s, 10/1/27 BBB+ 3,820,619
2,500,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Rev. Bonds (American Airlines,
Inc.), 8 1/4s, 11/1/36 Caa2 1,843,750
3,000,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Corp. Rev. Bonds (American
Airlines, Inc.), 6 3/8s, 5/1/35 Caa2 1,878,750
500,000 Georgetown, Hlth. Fac. Dev. Corp.
Rev. Bonds, 6 1/4s, 8/15/29 BB 474,375
Houston, Arpt. Syst. Rev. Bonds
7,000,000 (Special Fac. - Continental
Airlines, Inc.), Ser. E, 6 3/4s,
7/1/21 B- 5,635,000
3,000,000 (Continental Airlines, Inc.),
Ser. C, 5.7s, 7/15/29 B- 1,983,750
5,500,000 Lufkin, Hlth. Fac. Dev. Corp.
Rev. Bonds (Memorial Hlth. Syst. of
East TX), 5.7s, 2/15/28 BBB 5,273,125
5,265,000 Round Rock, Hotel Occupancy Tax
Rev. Bonds (Convention Ctr.
Complex), 5.85s, 12/1/24 BBB/P 5,021,494
4,500,000 Sam Rayburn Muni. Pwr. Agcy.
Rev. Bonds, 6s, 10/1/21 Baa2 4,691,250
Tomball, Hosp. Auth. Rev. Bonds
(Tomball Regl. Hosp.)
6,250,000 6 1/8s, 7/1/23 Baa2 6,329,563
2,095,000 6s, 7/1/25 Baa2 2,097,619
--------------
45,342,733
Utah (1.2%)
- -------------------------------------------------------------------------------
Carbon Cnty., Solid Waste Disp.
Rev. Bonds (Laidlaw Env.), Ser. A
1,000,000 7 1/2s, 2/1/10 BB- 1,024,910
600,000 7.45s, 7/1/17 BB- 621,000
5,500,000 Tooele Cnty., Harbor & Term. Dist.
Port Fac. Rev. Bonds (Union
Pacific), Ser. A, 5.7s, 11/1/26 Baa2 5,465,625
4,480,000 UT Cnty., Env. Impt. Rev. Bonds
(Marathon Oil Project), 5.05s,
11/1/17 Baa1 4,810,400
--------------
11,921,935
Virginia (2.7%)
- -------------------------------------------------------------------------------
5,250,000 Henrico Cnty. Econ. Dev. Auth.
Rev. Bonds (United Methodist),
Ser. A, 6.7s, 6/1/27 BB+/P 5,328,750
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB
(Bon Secours Hlth. Syst.), FSA,
10.205s, 8/23/27 Aaa 2,547,500
2,500,000 James Cnty., Indl. Dev. Auth.
Rev. Bonds (Williamsburg), Ser. A,
6 1/8s, 3/1/32 BB-/P 2,509,375
4,000,000 Peninsula Ports Auth. Rev. Bonds (VA
Baptist Homes), Ser. A, 7 3/8s,
12/1/32 B+/P 4,125,000
3,910,000 Pocahontas Parkway Assn. Toll Rd.
Rev. Bonds, Ser. A, 5 1/2s, 8/15/28 BB 3,323,500
Roanoke Cnty. Indl. Dev. Auth.
Rev. Bonds (Res. Care Fac.), Ser. A
2,000,000 6.3s, 7/1/35 B+/P 1,990,000
1,000,000 4.4s, 7/1/08 B+/P 993,750
1,000,000 Russell Cnty. Indl. Dev. Auth. Poll.
Control Rev. Bonds (Appalachian Pwr.
Co.), Ser. I, 2.7s, 11/1/07 Baa2 992,500
5,510,000 Suffolk, Redev. & Hsg. Auth.
Rev. Bonds (Beach-Oxford Apts.),
6 1/4s, 10/1/33 BB-/P 5,000,325
--------------
26,810,700
Washington (0.9%)
- -------------------------------------------------------------------------------
4,870,000 Tobacco Settlement Auth. of WA
Rev. Bonds, 6 1/2s, 6/1/26 BBB 4,559,538
5,500,000 Washington Cnty., Hsg. & Redev.
Auth. Rev. Bonds (Healtheast),
5 1/2s, 11/15/27 Ba2 4,805,625
--------------
9,365,163
West Virginia (0.7%)
- -------------------------------------------------------------------------------
3,475,000 Mason Cnty., Poll. Control FRB
(Appalachian Pwr. Co. Project),
Ser. L, 5 1/2s, 10/1/22 Baa2 3,475,000
4,495,000 Princeton, Hosp. Rev. Bonds (Cmnty.
Hosp. Assn., Inc.), 6.1s, 5/1/29 B2 3,253,240
--------------
6,728,240
Wisconsin (0.6%)
- -------------------------------------------------------------------------------
Badger Tobacco Settlement
Asset Securitization Corp.
Rev. Bonds
1,000,000 7s, 6/1/28 BBB 952,500
5,500,000 6 3/8s, 6/1/32 BBB 4,675,000
--------------
5,627,500
Wyoming (0.9%)
- -------------------------------------------------------------------------------
5,350,000 Sweetwater Cnty., Poll. Control
Rev. Bonds (Idaho Power Co.
Project), Ser. A, 6.05s, 7/15/26 A3 5,644,250
3,400,000 Sweetwater Cnty., Poll. Control
VRDN (Pacificorp.), Ser. B, 1.15s,
1/1/14 VMIG1 3,400,000
--------------
9,044,250
--------------
Total Municipal bonds and notes
(cost $977,255,311) $979,408,183
Preferred stocks (1.1%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
2,000,000 Charter Mac. Equity Trust 144A
Ser. A, 6.625% cum. pfd. A3 $2,195,000
8,000,000 MuniMae Tax Exempt Bond Subsidiary,
LLC 144A Ser. B, 7 3/4s cum. pfd. BBB- 9,000,000
--------------
Total Preferred stocks
(cost $10,000,000) $11,195,000
Common stocks (0.2%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
70,874 Hoover Group, Inc. (NON) (AFF) $7
184,103 Tembec, Inc. (Canada) (NON) 1,503,249
--------------
Total Common stocks
(cost $9,057,285) $1,503,256
- -------------------------------------------------------------------------------
Total Investments
(cost $996,312,596) $992,106,439
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $997,151,328.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at July 31, 2004 for the securities
listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at July 31, 2004. Securities rated by Putnam are indicated by
"/P" . Ratings are not covered by the Report of Independent Registered
Public Accounting Firm.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at July 31, 2004 was
$26,516,056 or 2.7% of net assets.
(AFF) Affiliated Companies (Note 5).
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on IFB, which are securities paying interest rates that
vary inversely to changes in the market interest rates, VRDN, mandatory
put bonds, and Floating Rate Bonds (FRB) are the current interest rates
at July 31, 2004.
The fund had the following industry group concentrations greater than
10% at July 31, 2004 (as a percentage of net assets):
Health care 35.9%
Utilities 15.0
The dates shown on Mandatory Put Bonds are the next mandatory put dates.
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
July 31, 2004
Assets
- -------------------------------------------------------------------------------
Investment in securities, at value (Note 1):
- -------------------------------------------------------------------------------
Unaffiliated Issuers (identified cost $996,312,596) $992,106,432
- -------------------------------------------------------------------------------
Affiliated Issuers (identified cost $--) (Note 5) 7
- -------------------------------------------------------------------------------
Cash 176,716
- -------------------------------------------------------------------------------
Interest and other receivables 14,103,716
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 199,944
- -------------------------------------------------------------------------------
Receivable for securities sold 11,287,526
- -------------------------------------------------------------------------------
Total assets 1,017,874,341
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 1,697,276
- -------------------------------------------------------------------------------
Payable for securities purchased 16,220,845
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,135,402
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 895,878
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 208,411
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 130,000
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,118
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 279,013
- -------------------------------------------------------------------------------
Other accrued expenses 154,070
- -------------------------------------------------------------------------------
Total liabilities 20,723,013
- -------------------------------------------------------------------------------
Net assets $997,151,328
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,182,130,934
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,539,732
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (183,313,181)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (4,206,157)
- -------------------------------------------------------------------------------
Total - Representing net assets applicable to capital shares
outstanding $997,151,328
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($798,736,694 divided by 64,085,614 shares) $12.46
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $12.46)* $13.05
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($180,830,324 divided by 14,485,594 shares)** $12.48
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($10,599,538 divided by 850,042 shares)** $12.47
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($6,984,772 divided by 560,450 shares) $12.46
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.46)*** $12.88
- -------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25000 or
more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial
statements.
Statement of operations
Year ended July 31, 2004
Interest income: $70,377,178
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 6,543,183
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,247,115
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 40,661
- -------------------------------------------------------------------------------
Administrative services (Note 2) 22,508
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,779,034
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,713,061
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 111,705
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 40,621
- -------------------------------------------------------------------------------
Other 265,501
- -------------------------------------------------------------------------------
Non-recurring costs (Note 5) 17,961
- -------------------------------------------------------------------------------
Costs assumed by Manager (Note 5) (17,961)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (182,373)
- -------------------------------------------------------------------------------
Total expenses 11,581,016
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (41,179)
- -------------------------------------------------------------------------------
Net expenses 11,539,837
- -------------------------------------------------------------------------------
Net investment income 58,837,341
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (68,993,242)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 85,385,128
- -------------------------------------------------------------------------------
Net gain on investments 16,391,886
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $75,229,227
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Year ended July 31
Decrease in net assets 2004 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $58,837,341 $76,752,234
- -------------------------------------------------------------------------------
Net realized loss on investments (68,993,242) (46,006,262)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 85,385,128 (14,729,467)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 75,229,227 16,016,505
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
- -------------------------------------------------------------------------------
Class A (203,556) (17,230)
- -------------------------------------------------------------------------------
Class B (46,466) (3,945)
- -------------------------------------------------------------------------------
Class C (2,543) (187)
- -------------------------------------------------------------------------------
Class M (1,816) (171)
- -------------------------------------------------------------------------------
From tax-exempt income
- -------------------------------------------------------------------------------
Class A (48,239,448) (62,725,610)
- -------------------------------------------------------------------------------
Class B (9,618,834) (13,041,582)
- -------------------------------------------------------------------------------
Class C (514,977) (610,914)
- -------------------------------------------------------------------------------
Class M (418,432) (601,649)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (265,227,788) (113,047,446)
- -------------------------------------------------------------------------------
Total decrease in net assets (249,044,633) (174,032,229)
- -------------------------------------------------------------------------------
Net assets
- -------------------------------------------------------------------------------
Beginning of year 1,246,195,961 1,420,228,190
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $2,539,732 and
$3,083,364, respectively) $997,151,328 $1,246,195,961
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.88 $13.39 $13.27 $14.13
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income .68 .74 .83 .80 .80
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .15 (.57) (.52) .11 (.85)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .83 .17 .31 .91 (.05)
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.68) (.74) (.82) (.79) (.81)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.68) (.74) (.82) (.79) (.81)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.46 $12.31 $12.88 $13.39 $13.27
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.87 1.34 2.38 7.10 (.24)
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $798,737 $1,000,769 $1,115,695 $1,145,710 $1,114,842
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .92 (c) .91 .90 .88 .86
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.43 (c) 5.83 6.31 6.01 5.95
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05
- ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund for the period ended
July 31, 2004 reflect a reduction of 0.02% of the average net assets for
class A shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.33 $12.90 $13.41 $13.29 $14.15
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income .60 .67 .76 .73 .73
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .15 (.57) (.52) .12 (.86)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .75 .10 .24 .85 (.13)
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.60) (.67) (.75) (.73) (.73)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.60) (.67) (.75) (.73) (.73)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.48 $12.33 $12.90 $13.41 $13.29
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.16 0.82 1.88 6.55 (.82)
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $180,830 $222,970 $281,825 $356,506 $441,174
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.57 (c) 1.43 1.40 1.39 1.44
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.78 (c) 5.32 5.83 5.49 5.36
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05
- ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund for the period ended
July 31, 2004 reflect a reduction of 0.02% of the average net assets for
class B shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.89 $13.39 $13.27 $14.13
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income .58 .64 .72 .69 .69
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .16 (.58) (.51) .12 (.85)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .74 .06 .21 .81 (.16)
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.58) (.64) (.71) (.69) (.70)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.58) (.64) (.71) (.69) (.70)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.47 $12.31 $12.89 $13.39 $13.27
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.11 0.45 1.64 6.25 (1.05)
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,600 $12,028 $11,002 $6,779 $3,945
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.72 (c) 1.71 1.70 1.68 1.66
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.64 (c) 5.02 5.46 5.20 5.16
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05
- ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund for the period ended
July 31, 2004 reflect a reduction of 0.02% of the average net assets for
class C shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.89 $13.39 $13.27 $14.14
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income .64 .70 .79 .76 .77
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .15 (.58) (.51) .12 (.87)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .79 .12 .28 .88 (.10)
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.64) (.70) (.78) (.76) (.77)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.64) (.70) (.78) (.76) (.77)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.46 $12.31 $12.89 $13.39 $13.27
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.56 0.96 2.16 6.79 (.62)
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $6,985 $10,429 $11,706 $11,474 $13,745
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.22 (c) 1.21 1.20 1.18 1.16
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment inco
to average net assets (%) 5.13 (c) 5.54 6.00 5.70 5.65
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05
- ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund for the period ended
July 31, 2004 reflect a reduction of 0.02% of the average net assets for
class M shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
July 31, 2004
Note 1
Significant accounting policies
Putnam Tax-Free High Yield Fund (the "fund") is a series of Putnam
Tax-Free Income Trust (the "trust"), a Massachusetts business trust,
which is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
fund pursues its objective of seeking high current income exempt from
federal income tax by investing primarily in high-yielding, lower rated
tax-exempt securities constituting a portfolio that Putnam Investment
Management, LLC ("Putnam Management"), the fund's manager, an indirect
wholly-owned subsidiary of Putnam, LLC, believes does not involve undue
risk to income or principal. The fund invests in higher yielding, lower
rated bonds that have a higher rate of default due to the nature of the
investments.
The fund offers class A, class B, class C and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. Prior to
January 28, 2004, the maximum front-end sales charge for class shares
was 4.75%. Class B shares, which convert to class A shares after
approximately eight years, do not pay a front-end sales charge but pay a
higher ongoing distribution fee than class A and class M shares but
lower than class C shares, and are subject to a contingent deferred
sales charge, if those shares are redeemed within six years of purchase.
Class C shares have a higher ongoing distribution fee than class A,
class B, and class M shares, do not pay front-end sales charge but have
a one-year 1.00% contingent deferred sales charge and do not convert to
class A shares. Class M shares are sold with a maximum front-end sales
charge of 3.25% and pay an ongoing distribution fee that is higher than
class A shares but lower than class B and class C shares.
Effective April 19, 2004 (May 3, 2004 for defined contribution plans
administered by Putnam) a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase. The redemption fee is accounted for as an
addition to paid-in-capital.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are valued at fair
value on the basis of valuations provided by an independent pricing
service, approved by the Trustees. Such services use information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Other investments, including restricted
securities, are valued at fair value following procedures approved by
the Trustees. Such valuations and procedures are reviewed periodically
by the Trustees.
B) Security transactions and related investment income Security transactions
are recorded on the trade date (date the order to buy or sell is executed).
Gains or losses on securities sold are determined on the identified cost
basis.
Interest income is recorded on the accrual basis. Non-cash dividends, if
any, are recorded at the fair market value of the securities received.
All premiums/discounts are amortized/accreted on a yield-to-maturity
basis. The premium in excess of the call price, if any, is amortized to
the call date; thereafter, any remaining premium is amortized to
maturity.
C) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund would maintain an asset
coverage ratio of at least 300% and that borrowings would not exceed
prospectus limitations. For the period ended August 6, 2003, the fund
had no borrowings against the line of credit. Effective August 6, 2003,
the fund no longer participated in a committed line of credit.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986 (the "Code"), as amended.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At July 31, 2004, the fund had a capital loss carryover of $138,126,405
available to the extent allowed by tax law to offset future capital
gains, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------------------------
$21,345,454 July 31, 2006
23,390,767 July 31, 2007
7,813,842 July 31, 2008
1,682,906 July 31, 2009
1,466,587 July 31, 2010
4,722,800 July 31, 2011
77,704,049 July 31, 2012
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending July 31, 2005, $41,584,036 of losses recognized during the
period November 1, 2003 to July 31, 2004.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences include
temporary and permanent differences of post-October loss deferrals, the
expiration of capital loss carryover, dividends payable, defaulted bond
interest, market discount, straddle loss deferrals and
amortization/accretion. Reclassifications are made to the fund's capital
accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations. For the
year ended July 31, 2004, the fund reclassified $334,901 to decrease
undistributed net investment income and $16,178,513 to decrease
paid-in-capital, with an decrease to accumulated net realized losses of
$16,513,414.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $41,902,054
Unrealized depreciation (45,861,694)
------------
Net unrealized depreciation (3,959,640)
Undistributed tax-exempt
income 5,357,602
Undistributed ordinary income 77,571
Capital loss carryforward (138,126,405)
Post-October loss (41,584,036)
Cost for federal income
tax purposes $996,066,079
F) Expenses of the trust Expenses directly charged or attributable to any
fund will be paid from the assets of that fund. Generally, expenses of the
trust will be allocated among and charged to the assets of each fund on a
basis that the Trustees deem fair and equitable, which may be based on the
relative assets of each fund or the nature of the services performed and
relative applicability to each fund.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory services
monthly based on the average net assets of the fund. Such fee is based on the
following annual rates: 0.65% of the first $500 million of average net
assets, 0.55% of the next $500 million, 0.50% of the next $500 million, 0.45%
of the next $5 billion, 0.425% of the next $5 billion, 0.405% of the next $5
billion, and 0.39% of the next $5 billion and 0.38% thereafter.
Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary, bear other expenses) through
December 31, 2004, to the extent that the fund's net expenses as a percentage
of average net assets exceed the average expense ratio for the fund's Lipper
peer group of front-end load funds. For the year ended July 31, 2004, Putnam
Management waived $182,363 of its management fee to the fund.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and their
staff who provide administrative services to the fund. The aggregate amount
of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam Investor
Services, a division of PFTC, provides investor servicing agent functions to
the fund. During the year ended July 31, 2004, the fund paid PFTC $1,061,406
for these services.
The fund has entered into an arrangement with PFTC whereby credits realized
as a result of uninvested cash balances are used to reduce a portion of the
fund's expenses. For the year ended July 31, 2004, the fund's expenses were
reduced by $41,179 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of which
$1,888, as a quarterly retainer, has been allocated to the fund, and an
additional fee for each Trustees meeting attended. Trustees receive
additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees fees
payable on or after July 1, 1995. The deferred fees remain invested in
certain Putnam funds until distribution in accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as a
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Trustee compensation and expenses in the statement of operations. Accrued
pension liability is included in Payable for Trustee compensation and
expenses in the statement of assets and liabilities. The Trustees have
terminated the Pension Plan with respect to any Trustee first elected after
2003.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B, class C and class M shares pursuant to rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam
Retail Management GP, Inc., for services provided and expenses incurred in
distributing shares of the fund. The Plans provide for payments by the fund
to Putnam Retail Management at an annual rate of up to 0.35%, 1.00%, 1.00%
and 1.00% of the average net assets attributable to class A, class B, class C
and class M shares, respectively. The Trustees have approved payment by the
fund at the annual rates of 0.20%, 0.85%, 1.00% and 0.50% of the average net
assets attributable to class A, class B, class C and class M shares,
respectively.
For the year ended July 31, 2004, Putnam Retail Management, acting as
underwriter, received net commissions of $20,106 and $132 from the sale of
class A and class M shares, respectively, and received $488,748 and $1,698 in
contingent deferred sales charges from redemptions of class B and class C
shares, respectively.
Note 3
Purchases and sales of securities
During the year ended July 31, 2004, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $195,531,870 and $490,728,641, respectively. There were no
purchases or sales of U.S. government securities.
Note 4
Capital shares
At July 31, 2004, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 2,732,805 $34,050,893
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,371,678 29,690,091
- ----------------------------------------------------------------
5,104,483 63,740,984
Shares repurchased (22,318,200) (278,790,981)
- ----------------------------------------------------------------
Net decrease (17,213,717) $(215,049,997)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 7,302,265 $92,127,348
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,953,632 37,186,069
- ----------------------------------------------------------------
10,255,897 129,313,417
Shares repurchased (15,560,514) (195,724,936)
- ----------------------------------------------------------------
Net decrease (5,304,617) $(66,411,519)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 930,003 $11,644,576
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 387,564 4,859,493
- ----------------------------------------------------------------
1,317,567 16,504,069
Shares repurchased (4,916,360) (61,526,126)
- ----------------------------------------------------------------
Net decrease (3,598,793) $(45,022,057)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 1,854,677 $23,435,847
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 512,488 6,465,446
- ----------------------------------------------------------------
2,367,165 29,901,293
Shares repurchased (6,122,644) (77,328,504)
- ----------------------------------------------------------------
Net decrease (3,755,479) $(47,427,211)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 180,330 $2,259,492
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 21,463 268,452
- ----------------------------------------------------------------
201,793 2,527,944
Shares repurchased (328,482) (4,093,502)
- ----------------------------------------------------------------
Net decrease (126,689) $(1,565,558)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 345,325 $4,381,427
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 25,053 308,458
- ----------------------------------------------------------------
370,378 4,689,885
Shares repurchased (247,328) (3,113,145)
- ----------------------------------------------------------------
Net increase 123,050 $1,576,740
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 18,623 $232,608
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 22,470 281,100
- ----------------------------------------------------------------
41,093 513,708
Shares repurchased (327,841) (4,103,884)
- ----------------------------------------------------------------
Net decrease (286,748) $(3,590,176)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 47,097 $565,889
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 31,500 421,804
- ----------------------------------------------------------------
78,597 987,693
Shares repurchased (139,917) (1,773,149)
- ----------------------------------------------------------------
Net decrease (61,320) $(785,456)
- ----------------------------------------------------------------
Note 5
Transactions with affiliated issuers Transactions during the year with
companies in which the fund owned at least 5% of the voting securities
were as follows:
Purchase Sales Dividend Market
Affiliate Cost Cost Income Value
- ----------------------------------------------------------------------------
Hoover Group, Inc.* $-- $-- $-- $7
Market values are shown for those securities affiliated at period end.
* Security was acquired as part of a corporate action.
Note 6
Regulatory matters and litigation
On April 8, 2004, Putnam Management entered into agreements with the
Securities and Exchange Commission ("SEC") and the Massachusetts Securities
Division representing a final settlement of all charges brought against
Putnam Management by those agencies on October 28, 2003 in connection with
excessive short-term trading by Putnam employees and, in the case of the
charges brought by the Massachusetts Securities Division, by participants in
some Putnam-administered 401(k) plans. The settlement with the SEC requires
Putnam Management to pay $5 million in disgorgement plus a civil monetary
penalty of $50 million, and the settlement with the Massachusetts Securities
Division requires Putnam Management to pay $5 million in restitution and an
administrative fine of $50 million. The settlements also leave intact the
process established under an earlier partial settlement with the SEC under
which Putnam Management agreed to pay the amount of restitution determined by
an independent consultant, which may exceed the disgorgement and restitution
amounts specified above, pursuant to a plan to be developed by the
independent consultant.
Putnam Management, and not the investors in any Putnam fund, will bear all
costs, including restitution, civil penalties and associated legal fees
stemming from both of these proceedings. The SEC's and Massachusetts
Securities Division's allegations and related matters also serve as the
general basis for numerous lawsuits, including purported class action
lawsuits filed against Putnam Management and certain related parties,
including certain Putnam funds. Putnam Management has agreed to bear any
costs incurred by Putnam funds in connection with these lawsuits. Based on
currently available information, Putnam Management believes that the
likelihood that the pending private lawsuits and purported class action
lawsuits will have a material adverse financial impact on the fund is remote,
and the pending actions are not likely to materially affect its ability to
provide investment management services to its clients, including the Putnam
funds.
For the period ended July 31, 2004, Putnam Management has assumed $17,961 of
legal, shareholder servicing and communication, audit, and Trustee fees
incurred by the Fund in connection with these matters.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees is
continuing. The fund may experience increased redemptions as a result of
these matters, which could result in increased transaction costs and
operating expenses.
Federal tax information
(Unaudited)
The fund has designated 99.6% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 2005 will show the tax status of
all distributions paid to your account in calendar 2004.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
Ms. Baxter is the President of Baxter Associates, Inc., a private
investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta Corporation
(a printing and digital imaging firm), Ryerson Tull, Inc. (a steel service
corporation), Advocate Health Care and BoardSource, formerly the National
Center for Nonprofit Boards. She is Chairman Emeritus of the Board of
Trustees, Mount Holyoke College, having served as Chairman for five years and
as a board member for thirteen years. Until 2002, Ms. Baxter was a Director
of Intermatic Corporation (a manufacturer of energy control products).
Ms. Baxter has held various positions in investment banking and corporate
finance, including Vice President and Principal of the Regency Group, and
Vice President of and Consultant to First Boston Corporation. She is a
graduate of Mount Holyoke College.
Charles B. Curtis (4/27/40), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear
Threat Initiative (a private foundation dealing with national security
issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the Trustee
Advisory Council of the Applied Physics Laboratory, Johns Hopkins University.
Until 2003, Mr. Curtis was a member of the Electric Power Research Institute
Advisory Council and the University of Chicago Board of Governors for Argonne
National Laboratory. Prior to 2002, Mr. Curtis was a Member of the Board of
Directors of the Gas Technology Institute and the Board of Directors of the
Environment and Natural Resources Program Steering Committee, John F. Kennedy
School of Government, Harvard University. Until 2001, Mr. Curtis was a member
of the Department of Defense Policy Board and Director of EG&G Technical
Services, Inc. (a fossil energy research and development support company).
From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan &
Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr. Curtis
was Deputy Secretary of Energy. He served as Chairman of the Federal Energy
Regulatory Commission from 1977 to 1981 and has held positions on the staff
of the U.S. House of Representatives, the U.S. Treasury Department, and the
SEC.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity
buyout firm that specializes in energy investments in the diversified
worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil
Company, Continuum Health Partners of New York and various private
companies controlled by First Reserve Corporation, as well as a Trustee
of TH Lee, Putnam Investment Trust (a closed-end investment company
advised by an affiliate of Putnam Management). He is also a Trustee of
Sarah Lawrence College.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held executive
positions in investment banking and investment management with several firms
and with the federal government, including Deputy Associate Director of the
Office of Management and Budget and Deputy Director of the Federal Energy
Administration. He is active in various business associations, including the
Economic Club of New York, and lectures on energy issues in the United States
and Europe. Mr. Hill holds a B.A. degree in Economics from Southern Methodist
University and pursued graduate studies there as a Woodrow Wilson Fellow.
Ronald J. Jackson (12/17/43), Trustee since 1996
Mr. Jackson is a private investor.
Mr. Jackson is President of the Kathleen and Ronald J. Jackson
Foundation (a charitable trust). He is also a member of the Board of
Overseers of WGBH (a public television and radio station) as well as a
member of the Board of Overseers of the Peabody Essex Museum.
Mr. Jackson is the former Chairman, President and Chief Executive
Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he
retired in 1993. He previously served as President and Chief Executive
Officer of Stride-Rite, Inc. (a manufacturer and distributor of
footwear) and of Kenner Parker Toys, Inc. (a major toy and game
manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor
of women's apparel) and has held financial and marketing positions with
General Mills, Inc. and Parker Brothers (a toy and game company). Mr.
Jackson is a graduate of the University of Michigan Business School.
Paul L. Joskow (6/30/47), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and
Management, and Director of the Center for Energy and Environmental
Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid Transco (a UK-based
holding company with interests in electric and gas transmission and
distribution and telecommunications infrastructure) and TransCanada
Corporation (an energy company focused on natural gas transmission and
power services). He also serves on the board of the Whitehead Institute
for Biomedical Research (a non-profit research institution) and has been
President of the Yale University Council since 1993. Prior to February
2002, he was a Director of State Farm Indemnity Company (an automobile
insurance company), and, prior to March 2000, he was a Director of New
England Electric System (a public utility holding company).
Dr. Joskow has published five books and numerous articles on topics in
industrial organization, government regulation of industry, and
competition policy. He is active in industry restructuring,
environmental, energy, competition and privatization policies -- serving
as an advisor to governments and corporations worldwide. Dr. Joskow
holds a Ph.D. and M. Phil from Yale University and B.A. from Cornell
University.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and
cattle breeding). She is President Emeritus of Mount Holyoke College.
Dr. Kennan served as Chairman and is now Lead Director of Northeast
Utilities and is a Director of Talbots, Inc. She has served as Director
on a number of other boards, including Bell Atlantic, Chastain Real
Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life
Insurance. She is a Trustee of the National Trust for Historic
Preservation, of Centre College and of Midway College in Midway,
Kentucky. She is also a member of The Trustees of Reservations. Dr.
Kennan has served on the oversight committee of the Folger Shakespeare
Library, as President of Five Colleges Incorporated, as a Trustee of
Notre Dame University and is active in various educational and civic
associations.
As a member of the faculty of Catholic University for twelve years,
until 1978, Dr. Kennan directed the post-doctoral program in Patristic
and Medieval Studies, taught history and published numerous articles.
Dr. Kennan holds a Ph.D. from the University of Washington in Seattle,
an M.S. from St. Hilda's College at Oxford University and an A.B. from
Mount Holyoke College. She holds several honorary doctorates.
John H. Mullin, III (6/15/41), Trustee since 1997
Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).
Mr. Mullin serves as a Director of The Liberty Corporation (a broadcasting
company), Progress Energy, Inc. (a utility company, formerly known as
Carolina Power & Light) and Sonoco Products, Inc. (a packaging company). Mr.
Mullin is Trustee Emeritus of The National Humanities Center and Washington &
Lee University, where he served as Chairman of the Investment Committee.
Prior to May 2001, he was a Director of Graphic Packaging International Corp.
Prior to February 2004, he was a Director of Alex Brown Realty, Inc.
Mr. Mullin is also a past Director of Adolph Coors Company; ACX Technologies,
Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.; Fisher-Price, Inc.; and
The Ryland Group, Inc. Mr. Mullin is a graduate of Washington & Lee
University and The Wharton Graduate School, University of Pennsylvania.
Robert E. Patterson (3/15/45), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc.
Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a
Director of Brandywine Trust Company. Prior to June 2003, he was a
Trustee of Sea Education Association. Prior to December 2001, he was
President and Trustee of Cabot Industrial Trust (a publicly traded real
estate investment trust). Prior to February 1998, he was Executive Vice
President and Director of Acquisitions of Cabot Partners Limited
Partnership (a registered investment adviser involved in institutional
real estate investments). And, prior to 1990, he served as Executive
Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the
predecessor company of Cabot Partners) and as a Senior Vice President of
the Beal Companies (a real estate management, investment and development
firm).
Mr. Patterson practiced law and held various positions in state
government and was the founding Executive Director of the Massachusetts
Industrial Finance Agency. Mr. Patterson is a graduate of Harvard
College and Harvard Law School.
W. Thomas Stephens (9/2/42), Trustee since 1997
Mr. Stephens serves on a number of corporate boards.
Effective November 2004, Mr. Stephens is expected to become Chief Executive
Officer of Boise Cascade, L.L.C. (a paper, forest products and timberland
assets company). Mr. Stephens serves as a Director of Xcel Energy
Incorporated (a public utility company) and TransCanada Pipelines Limited.
Until 2004, Mr. Stephens was a Director of Qwest Communications and Norske
Canada, Inc. (a paper manufacturer). Until 2003, Mr. Stephens was a Director
of Mail-Well, Inc. (a diversified printing company). He served as Chairman of
Mail-Well until 2001 and as CEO of MacMillan-Bloedel, Ltd. (a forest products
company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of
Johns Manville Corporation. He holds B.S. and M.S. degrees from the
University of Arkansas.
George Putnam, III* (8/10/51), Trustee since 1984 and President since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of
financial advisory and other research services), and of New Generation
Advisers, Inc. (a registered investment advisor to private funds). Mr.
Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered
investment adviser). He is a Trustee of St. Mark's School, Shore Country
Day School, and until 2002 was a Trustee of the Sea Education Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert
LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a
graduate of Harvard College, Harvard Business School and Harvard Law
School.
A.J.C. Smith* (4/13/34), Trustee since 1986
Mr. Smith is the Chairman of Putnam Investments and Director of and
Consultant to Marsh & McLennan Companies, Inc.
Mr. Smith is also a Director of Trident Corp. (a limited partnership with
over thirty institutional investors). He is also a Trustee of the Carnegie
Hall Society, the Educational Broadcasting Corporation, and the National
Museums of Scotland. He is Chairman of the Central Park Conservancy and a
Member of the Board of Overseers of the Joan and Sanford I. Weill Graduate
School of Medical Sciences of Cornell University. Prior to May 2000 and
November 1999, Mr. Smith was Chairman and CEO, respectively, of Marsh &
McLennan Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of July 31, 2004, there were 102 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her
resignation, retirement at age 72, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the fund, Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc., the parent company of Putnam, LLC and its affiliated companies.
Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue
of their positions as officers of the fund, Putnam Management, Putnam
Retail Management or Marsh & McLennan Companies, Inc. and as
shareholders of Marsh & McLennan Companies, Inc. George Putnam, III is
the President of your fund and each of the other Putnam funds. Mr. Smith
serves as a Director of and Consultant to Marsh & McLennan Companies,
Inc. and as Chairman of Putnam Investments.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Associate Treasurer
and Principal Executive Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Jonathan S. Horwitz (6/4/55)
Senior Vice President and Treasurer
Since 2004
Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Senior Managing Director, Putnam Investments.
Prior to July 2001, Partner,
PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Daniel T. Gallagher (2/27/62)
Vice President and Legal and Compliance
Liaison Officer
Since 2004
Vice President, Putnam Investments. Prior to
2004, Associate, Ropes & Gray LLP; prior to
2000, Law Clerk, Massachusetts Supreme
Judicial Court
Francis J. McNamara, III (8/19/55)
Vice President and Chief Legal Officer
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2004,
General Counsel, State Street Research &
Management Company
James P. Pappas (2/24/53)
Vice President
Since 2004
Managing Director, Putnam Investments and
Putnam Management. From 2001 to 2002, Chief
Operating Officer, Atalanta/Sosnoff Management
Corporation; prior to 2001, President and Chief
Executive Officer, UAM Investment Services, Inc.
Richard S. Robie, III (3/30/60)
Vice President
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2003, Senior Vice
President, United Asset Management Corporation
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square,
Boston, MA 02109.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. Investors
should carefully consider the investment objective, risks, charges, and
expenses of a fund before investing. For a prospectus containing this and
other information for any Putnam fund or product, call your financial advisor
at 1-800-225-1581 and ask for a prospectus. Please read the prospectus
carefully before investing.
Growth Funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
Blend Funds
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
Value Funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund+
Income Funds
American Government Income Fund
Putnam Floating Rate Income Fund
Diversified Income Trust
Global Income Trust*
High Yield Advantage Fund*+
High Yield Trust*
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund++
U.S. Government Income Trust
Tax-free Income Funds
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds
Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Ohio and Pennsylvania
Asset Allocation Funds
Putnam Asset Allocation Funds--three investment portfolios
that spread your money across a variety of stocks, bonds,
and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* A 1% redemption fee on total assets redeemed or exchanged between 6 and 90
days of purchase may be imposed for all share classes of these funds.
+ Closed to new investors.
++ An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the fund seeks to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
With the exception of money market funds, a 2% redemption fee will be
applied to shares exchanged or sold within 5 days of purchase.
Check your account balances and the most recent month-end performance at
www.putnaminvestments.com.
Services for shareholders
Investor services
Help your investment grow Set up a program for systematic investing with as
little as $25 a month from a Putnam fund or from your own savings or checking
account. (Regular investing does not guarantee a profit or protect against
loss in a declining market.)
Switch funds easily* You can move money from one Putnam fund to another
within the same class of shares without a service charge.
Access your money easily You can have checks sent regularly or redeem shares
any business day at the then-current net asset value, which may be more or
less than the original cost of the shares. Class B and class C shares carry a
sales charge that is applied to certain withdrawals.
How to buy additional shares You may buy shares through your financial
advisor or directly from Putnam. To open an account by mail, send a check
made payable to the name of the fund along with a completed fund application.
To add to an existing account, complete the investment slip found at the top
of your Confirmation of Activity statement and return it with a check payable
to your fund.
For more information
Visit www.putnaminvestments.com A secure section of our Web site contains
complete information on your account, including balances and transactions,
updated daily. You may also conduct transactions, such as exchanges,
additional investments, and address changes. Log on today to get your
password.
Use our toll-free number 1-800-225-1581 Ask a helpful Putnam representative
or your financial advisor for details about any of these or other services,
or see your prospectus.
* This privilege is subject to change or termination. An exchange of funds
may result in a taxable event. In addition, a 2% redemption fee will be
applied to shares exchanged or sold within 5 days of purchase, and certain
funds have imposed a 1% redemption fee on total assets redeemed or exchanged
between 6 and 90 days of purchase.
Putnam puts your interests first
In January, Putnam announced a number of voluntary initiatives designed to
reduce fund expenses, provide investors with more useful information, and
help safeguard the interests of all Putnam investors. For details, visit
www.putnaminvestments.com.
Cost-cutting initiatives
Reduced sales charges
Effective immediately, the maximum sales charge for class A shares has been
reduced to 5.25% for equity funds (formerly 5.75%) and 4.50% for most income
funds (formerly 4.75%).*
Lower class B purchase limit
To help ensure that investors are in the most cost-effective share class, the
maximum amount that can be invested in class B shares has been reduced to
$100,000. (Larger trades or accumulated amounts will be directed to class A
shares.)
Ongoing expenses will be limited
During calendar 2004, total ongoing expenses, including management fees for
all funds, will be maintained at or below the average of each fund's industry
peers in its Lipper load-fund universe. For more information, please see the
Statement of Additional information.
Additional measures are being taken to reduce expenses for shareholders in
the six global and international funds that had short-term trading issues.
Improved disclosure
Putnam fund prospectuses and shareholder reports are being revised to
disclose additional information that will help shareholders compare funds and
weigh their costs and risks along with their potential benefits. Shareholders
will find easy-to-understand information about fund expense ratios, portfolio
manager compensation, risk comparisons, brokerage commissions, and employee
and trustee ownership of Putnam funds. Disclosure of breakpoint discounts is
also being enhanced to alert investors to potential cost savings.
Protecting investors' interests
New short-term trading fee introduced
To discourage short-term trading, which can interfere with a fund's long-term
strategy, a 2% short-term trading fee will be imposed on any Putnam fund
shares redeemed or exchanged within five calendar days of purchase.
* The maximum sales charge for class A shares of Putnam U.S. Intermediate
Government Income Fund remains 3.25%.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and
Principal Executive Officer
Jonathan S. Horwitz
Senior Vice President
and Treasurer
Steven D. Krichmar
Vice President and Principal
Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Daniel T. Gallagher
Vice President and Legal and
Compliance Liaison Officer
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and BSA
Compliance Officer
Francis J. McNamara, III
Vice President and
Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free High
Yield Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, the most recent copy of Putnam's
Quarterly Performance Summary, and Putnam's Quarterly Ranking Summary. For
more recent performance, please visit www.putnaminvestments.com. Investors
should carefully consider the investment objective, risks, charges, and
expenses of a fund, which are described in its prospectus. For this and other
information or to request a prospectus, call 1-800-225-1581 toll free. Please
read the prospectus carefully before investing. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site
www.putnaminvestments.com.
AN042-216502 9/04
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
The following table presents fees billed in each of the last two fiscal
years for services rendered to the fund by the fund's independent
auditors:
Audit Audit-Related Tax All Other
Fiscal year ended Fees Fees Fees Fees
- ----------------- ---------- ------------- ------- ---------
July 31, 2004 $69,779* $-- $6,306 $206
July 31, 2003 $66,955 $-- $5,703 $--
* Includes fees of $ 888 billed by the fund's independent auditor to the
fund for audit procedures necessitated by regulatory and litigation
matters. These fees were reimbursed to the fund by Putnam.
For the fiscal years ended July 31, 2004 and July 31, 2003, the fund's
independent auditors billed aggregate non-audit fees in the amounts of
$140,140 and $ 79,298 , respectively, to the fund, Putnam Management and
any entity controlling, controlled by or under common control with
Putnam Management that provides ongoing services to the fund.
Audit Fees represents fees billed for the fund's last two fiscal years.
Audit-Related Fees represents fees billed in the fund's last two fiscal
years for services traditionally performed by the fund's auditor,
including accounting consultation for proposed transactions or
concerning financial accounting and reporting standards and other audit
or attest services not required by statute or regulation.
Tax Fees represent fees billed in the fund's last two fiscal years for
tax compliance, tax planning and tax advice services. Tax planning and
tax advice services include assistance with tax audits, employee benefit
plans and requests for rulings or technical advice from taxing
authorities.
All Other Fees Fees represent fees billed for services relating to fund
expense processing.
Pre-Approval Policies of the Audit and Pricing Committee. The Audit and
Pricing Committee of the Putnam funds has determined that, as a matter
of policy, all work performed for the funds by the funds' independent
auditors will be pre-approved by the Committee and will generally not be
subject to pre-approval procedures.
Under certain circumstances, the Audit and Pricing Committee believes
that it may be appropriate for Putnam Investment Management, LLC
("Putnam Management") and certain of its affiliates to engage the
services of the funds' independent auditors, but only after prior
approval by the Committee. Such requests are required to be submitted
in writing to the Committee and explain, among other things, the nature
of the proposed engagement, the estimated fees, and why this work must
be performed by that particular audit firm. The Committee will review
the proposed engagement at its next meeting.
Since May 6, 2003, all work performed by the independent auditors for
the funds, Putnam Management and any entity controlling, controlled by
or under common control with Putnam Management that provides ongoing
services to the fund was pre-approved by the Committee or a member of
the Committee pursuant to the pre-approval policies discussed above.
Prior to that date, the Committee had a general policy to pre-approve
the independent auditor's engagements for non-audit services with the
funds, Putnam Management and any entity controlling, controlled by or
under common control with Putnam Management that provides ongoing
services to the fund.
The following table presents fees billed by the fund's principal auditor
for services required to be approved pursuant to paragraph (c)(7)(ii) of
Rule 2-01 of Regulation S-X.
Audit-Related Tax All Other Total Non-
Fiscal year ended Fees Fees Fees Audit Fees
- ----------------- ------------- ---- --------- ----------
June 30, 2004 $-- $-- $-- $--
June 30, 2003 $-- $-- $-- $--
Item 5. Audit Committee: Not applicable
- -------------------------
Items 6. Schedule of Investments: Not applicable
- ---------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal
financial officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the
registrant in this report is recorded, processed, summarized
and reported within the time periods specified in the
Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: September 27, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: September 27, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: September 27, 2004